How Much Money Do You Need To Start A Business?
Startup capital is a necessity for virtually all businesses. However, the cost to start a business varies widely depending on what kind of business you are starting. For example, a home-based endeavor such as a dropshipping company or an Amazon business can cost less than $1,000 to get off the ground; the same goes for a business that doesn’t require an office or much equipment, such as a pet sitting business. On the other hand, opening a business that requires more equipment and office space—such as an autobody shop or a coffee shop—could cost $100,000 or more.
In this post, I’ll go over the main costs associated with starting a business and what you can expect to pay for each of them.
Surprisingly, there aren’t too many official statistics available on how much it costs to start a business, probably because the costs vary so much. There was a study conducted by the Ewing Marion Kauffman Foundation way back in 2009 that found the average cost to start a business at that time was $30,000.
Below, we’ve put together our own startup business cost figures, but keep in mind that the amount you’ll spend will vary greatly depending on various factors, such as your industry and location.
Table of Contents
Common Small Business Expenses
|Startup Expense||Estimated Cost|
|Business Licenses & Permits||$200|
|Business Insurance||$1,000 (annually)|
|Equipment & Supplies||$10,000|
|Office Space & Utilities||$5,000 initially, then $2,000 monthly|
|Marketing||$700 initially, then $200 monthly|
|Business Software||$200 (monthly)|
|Professional Services (e.g., legal services)||$600|
|Total estimated cost: $28,200|
Business Licenses & Permits
As a new business owner, you will need to register your business in your state and apply for a local business license/permit in your city or county. Depending on your industry, you may also need to obtain an industry-specific business permit. These initial business registration costs are usually minimal (less than $500).
There are several types of business insurance for startups and which type(s) you need depends on various factors. Insurance is a significant, ongoing business cost. Most businesses will need general liability insurance and business property insurance, and if you have employees, you will also need to pay for workers compensation insurance and health insurance. Commercial vehicle insurance and product liability insurance are some other business types you may or not need.
Equipment & Supplies
All businesses require some sort of equipment or supplies, but these costs vary significantly depending on what type of business you have. Examples of equipment and supplies include:
- Restaurant kitchen equipment
- Office furniture
- Office supplies
- Business vehicle(s)
- Medical equipment & supplies
- Product manufacturing equipment
- Point of sale equipment (cash register, credit card reader, etc.)
The type of equipment and other materials you need to run your business really depends on your industry—for example, if you’re starting a wedding planner business, you’ll probably just need a computer and office supplies, whereas a trucking company will need commercial vehicles, etc.
Office Space & Utilities
If you need to rent or buy an office space, this will be a significant ongoing expense, and a big startup cost too, as you will need to pay a security deposit, first and last month’s rent, etc. Internet, gas and electricity, a business phone, and data plans will also factor into the infrastructure costs of your office space. Most businesses start out as home-based or rent a business space initially, instead of purchasing or building property.
If you sell a physical product, you need a certain amount of inventory to start out with (and have on-hand on an ongoing basis). Retail stores need a certain number of finished products on hand, while food-based businesses such as food trucks, for example, need to stock up on raw ingredients before they can open up shop. This, of course, does not apply to information-based businesses, such as consulting businesses or various other service-based businesses.
You may or may not start your business with any employees. If you do have employees, you need to factor in payroll costs, payroll taxes, insurance costs (workers comp. and health insurance), and training costs.
Modern business marketing includes not only business cards, advertisements, signage, etc., but also digital marketing costs such as SEO, social media marketing, and website maintenance costs. As far as your digital marketing, at the very least you will need a website and social media presence. Tip: Be sure you register your domain early on in the process of starting your business, as your website will be the foundation of your online marketing.
Some different types of business software you might need to launch and run your business include:
- Accounting software
- Booking software
- POS software
- eCommerce/shopping cart software
- Invoicing software
- Inventory software
- ERP software
- Website builder software
- Project management software
- Shipping software
- Email marketing software
- Industry-specific business software (for example, specialized software for dentists, auto mechanics, etc.)
Some small business software programs combine multiple functions. For example, a restaurant management software system might include POS functionality as well as accounting, inventory, employee management, and maybe even email marketing functions. An accounting program like QuickBooks combines accounting, payroll, and invoicing functions, with POS functionality as an add-on.
Generally, most business software apps are no longer large programs that you install onto a computer as a one-time expense; rather, today’s business software is usually app/cloud-based, meaning you can sign in from any internet-connected device. And rather than paying for the software as a large, one-time expense, today’s software-as-a-service (SaaS) model is based on monthly payments with no down payment or long-term commitment. So, initial investment for business software will likely be much less than you would have paid for a comparable program 15 or 20 years ago. Some business software is even free to use.
In addition to software, don’t forget to factor in the cost of the associated hardware you’ll need to run the software into your equipment costs. For example, most businesses will need point of sale equipment, a laptop or iPad, a wireless router, etc. For very small businesses requiring only a basic app to take payments, it’s possible that the only hardware you might need is your smartphone.
This category can include legal fees, consultancy fees, accountant fees, and fees for any other professional services you use to help launch your business. While some businesses require minimal professional services, most businesses should at least consult a lawyer and/or professional accountant during the startup phase.
You’ll more than likely find out that there are more startup costs than you initially anticipated. Thus, it’s important to have a certain amount of your budget set aside for miscellaneous expenses that will inevitably come up. Some various costs you’ll need to include in your budget may include:
- Organizational dues
- Travel costs
- Shipping fees
- Loan interest
- Credit card processing fees (once you start making sales)
Of course, you’ll also need to make sure you have enough money to support yourself before your business becomes profitable, so make sure this cost is included as well.
How To Calculate Startup Costs
The SBA has a very useful startup cost worksheet that outlines common business startup costs with sample figures that you can personalize to calculate the true cost of starting your business. Simply enter the estimated cost for each category (rent, utilities, inventory, employees, etc.) and you’ll be able to get a rough estimate of how much money you might need for your initial investment.
It’s also a good idea to make a sales forecast, in which you estimate how much you will sell in the first 6–12 months of opening your business. How long will it take for your business to make a profit? How long ’til you can pay off your startup expenses? With your prospective revenue in mind, you’ll have a better idea of how much you can afford to spend on ongoing expenses such as payroll and inventory.
If the total seems unaffordably high, look for areas you might be able to cut costs. For example, could you operate your business out of your home for the first six months? Could you subcontract workers instead of hiring employees? Could you use dropshipping to deliver goods to customers directly from the manufacturer, instead of buying inventory upfront?
Once you have a good idea of how much startup capital you might need for your first 6–12 months in business, you can decide how you will finance your venture.
What To Do If You Don’t Have The Money
Startup funding can be difficult to procure from a traditional bank, especially if you don’t have any significant assets or previous experience owning a business. However, that doesn’t mean you don’t have any options. Online technology has actually made it a lot easier to find small business funding. Here are some options you might try to finance your business.
- Online Loan: This category includes both online business loans and online personal loans. Generally, online business loans for startups are limited to short-term, high-interest loans; you won’t qualify for better terms unless you’ve been in business at least two years. Still, it’s definitely worth looking into to see what kind of loans and rates you might qualify for. Some online lenders might even offer access to SBA loans for entrepreneurs, such as SBA microloans. Look at our startup business loan comparison chart to find some startup-friendly loan options.
- Business Credit Cards: If you just need a few thousand dollars to get started, a business credit card can be a smart choice. You can use a business credit card to charge startup expenses, and/or to get a cash advance (though make sure you check the terms on the advance because they usually charge high interest). You could also use a personal credit card, though business credit cards typically have more business-specific benefits, such as cash-back for common business expenses. Look at our best small business credit cards comparison to see some of the top business cards’ requirements and perks.
- Equipment Financing: If your main startup expense is the equipment you’ll need to run your business — for example, restaurant kitchen equipment, manufacturing equipment, office equipment, etc. — then you can simply finance the equipment itself, in the form of an equipment loan or lease. Similar to automotive financing, equipment financing involves monthly payments (either to lease or own), and does not typically require good credit or any collateral other than the equipment itself. Check out our equipment financing comparison chart to see your best options.
- Line Of Credit: A business line of credit is similar to a credit card in the sense that you can have it on hand to pay for expenses, but you only have to repay what you use. Like a business loan, you can get a line of credit from an online lender or a traditional bank. However, startups will have better luck finding a line of credit online; there are several online line of credit providers that only require only 6 or fewer months in business, whereas banks typically will not extend a line of credit to startups. Check out our line of credit comparison page to find some startup-friendly LOC options.
Other startup financing ideas:
- Loan from friends/family
- Seed investors
- Business grant
- Nonprofit lenders
- Personal retirement savings— rollover a retirement account using a ROBS (rollovers as business startups) plan
Our team at Merchant Maverick has also written many informative articles about startup financing that can help you on your journey:
- Crowdfunding For Startups: 8 Tips For Launching
- Don’t Let Bad Credit Stop You From Getting A Startup Loan
- The Best Business Cards For Startups And Entrepreneurs
- SBA Loans For Startups
- How To Find A Startup Grant
- 14 Types Of Alternative Financing For Small Businesses
- The Best Business Credit Cards For People With Bad Credit
Tax-Deductible Startup Costs
If your total startup costs are $50K or less, you can write off up to $10,000 of startup costs on your taxes in the year that you start the business, including up to $5,000 in business startup costs and another $5,000 in organizational expenses (legal fees, state incorporation fees, etc.). If your startup costs exceed $50,000, the amount of your allowable deduction will be reduced by that dollar amount, and if your startup costs are more than $55,000, you are not eligible for the deduction.
Certain startup expenses are not tax-deductible—for example, the costs to qualify for doing business in your industry, such as real estate licensing costs, are not deductible as a startup expense. Additionally, business assets (one-time business expenditures such as vehicles and equipment) are not deductible as startup expenses, but may be deductible in a different category (amortization).
(In case you were wondering, business loan interest is, indeed, tax-deductible.)
It may be a cliche, but it is also true that “it takes money to make money.” Startup business costs can range from under $10K to over $100K, depending on a number of factors. It’s okay if you don’t have all the money right now: the important thing is to put together an accurate estimate of how much you will need, what you will spend the money on, and how/when you’ll be able to repay any borrowed monies with your revenue. You can then incorporate this estimate into your business plan and the loan proposal you will use to demonstrate to lenders that you are a good candidate for financing.
With the numerous financing options available to entrepreneurs these days, there is a great chance that if you have a sound business plan and accurate, reasonable startup cost estimate, you will be able to find a lender that can meet your startup financing needs.