How Much Does It Cost to Start a Small Business?

If you're starting a new business and your first question is how much money you need, you're probably asking the wrong first question.

Few owners have the luxury of going into a new business startup knowing exactly how much money they'll need. The cost of starting a business depends on the type and size of the business, the industry, the location, the competition, and many other factors.

How much money you need also depends on how long it will take your business to break even and turn a profit. For some businesses, it could be three months. Others can take a year or longer.

A better question is, "What expenses will I have in the first six to 18 months of operating my business?" The next question you should ask is, "Do I have enough cash to pay those expenses until my business generates enough revenue to pay them?"

Identify Your Expenses

Having a business plan can help you focus on the types of expenses you must cover to start your company. If you don't have a business plan, you can still project your expenses on a monthly and quarterly basis to determine how much money you'll need to pay your bills.

Include both one-time expenses, like furniture, and ongoing expenses, like rent. Some expenses, like inventory, are variable—they'll change as your business grows—so it's important to revise your projections as your business rolls out.

Once you've identified the items you must include in your expenses, you'll have to estimate how much each will cost. Estimating costs takes a lot of research and a little bit of guesswork. The more realistic your estimates, the less likely you'll be to run out of cash (the primary reason most small businesses fail). Consult trade associations and other available research to estimate your costs, and make sure you comparison shop to get the best prices for your budgeted items.

The list below includes expense items common to many businesses. Include all the expenses that apply to your business, and remember to include any other expenses that are unique to your business. Some of these expenses are one-time, initial costs; others are recurring.

Business entity formation costs. If yours will be a one-person, owner-run business, it will be a "sole proprietorship," and you won't have to file any paperwork with state agencies. But if you'll have multiple owners, you'll need to decide whether to be a partnership, limited liability company (LLC), or corporation. The last two business entities must complete paperwork with their state formation agency, and pay for the privilege. (Single owners can also choose to operate as an LLC or a corporation, particularly when they wish to limit their personal liability for their business's debts.) You can read more about business entities in Nolo's article, "Business Ownership Structures."

Inventory. If you are manufacturing or retailing goods, you'll have to start out with an inventory of products or raw materials.

Consider how many varieties of items you plan to sell, projected sales revenues, how quickly products will turn over (how many times you expect to replenish your stock over a specific period of time), how much storage space you have, and average supplier shipping times. As your business rolls out, make sure you conduct regular inventory checks and revise your projections when needed.

Rent. If you are manufacturing or retailing goods, or providing services in a brick-and-mortar location, you'll need a physical location and will have to factor in your monthly rental costs. Remember to include your initial security deposit and other expenses, like insurance and common area maintenance, that might be required.

If you are starting a home-based business, you might think that your rent is free, but you should factor in the portion of your home's rent or mortgage costs so that you are accurately reflecting the cost of the goods you sell or make.

Utilities. Electricity, gas, water, and trash disposal will be different for a restaurant than an insurance business, and these costs will also differ depending on the size of your facility and your hours of operation. If you're renting in a multi-tenant property, these costs will likely be spread among all tenants, and you'll pay a specified portion.

Technology. Include phones, printers, and fax machines, as well as computers.

Furnishings, fixtures, and equipment. Add office furniture, lighting, built-ins such as counter space, and shelving for warehouses when applicable.

License and permit fees. Include any licenses and permits you'll need to obtain at the outset, such as a seller's permit, as well as fees to register your business and domain name.

Accounting and legal fees. Budget for accounting software and professional accounting assistance as well as legal assistance, if needed, to set up your business.

Website design and platform development. Consider whether you can use an off-the-shelf website, such as those supplied by ecommerce platforms. If your business requires a customized design and platform, you'll need to engage a web page designer.

Off-the-shelf website offerings often also give you an option for website hosting services. If you are developing a customized website from scratch, you'll also need to account for hosting services and maintenance costs.

If you will be accepting electronic or credit card payments, remember to include processing fees.

Packaging and shipping costs. These costs represent a significant portion of expenses for ecommerce retailers and other types of businesses, such as wholesalers.

Salaries and wages. If you're starting out with employees, you'll have to account for salaries and wages. Remember to also include payroll taxes, unemployment insurance premiums, and any benefits you will offer.

Advertising and marketing. Consider expenses like the cost to design a logo, announce your business opening, and business cards. If you have a brick-and-mortar location you'll need signage, and if you plan to sell at trade shows, include the cost of exhibiting as well as travel expenses. Keep in mind that marketing costs tend to get lower as sales increase.

Insurance. The type or types of insurance you need will depend on your business. Owners with brick-and-mortar locations carry general liability insurance to protect against damage the business might cause to others like customers (if you rent, your lease will undoubtedly require it; if you own the space, your lender might require it too). If you have valuable business equipment, you'll want property insurance to protect your business or real estate from damages due to events like fire and theft. A commercial auto policy will protect vehicles your business uses in the event of traffic accidents and from losses due to theft or fire. If you have employees, you are required to carry workers compensation insurance.

Don't make the mistake of thinking that your homeowner's or personal auto policy will cover your business property or insure your business vehicles. You'll need a separate commercial policy for these protections.

Business supplies. Include a budget for pens, writing pads, mailing stamps, and so on.

Estimate Your Costs

Once you've identified the expense items that pertain to your business, you'll need to assign a dollar amount to those items.

Take into account seasonal variations and items that are tax deductible (although you'll still need enough to cover the full cost until you file your taxes at year-end). Keep in mind that the cost of variable items like inventory or employee wages can change as your business grows.

While you want to come up with a realistic projection of expenses, it's a good idea to heed the old expression, "Everything costs twice as much and takes twice as long as you think it will."

You might not need to fully double your estimated expenses, but at a minimum, you should add a cushion to account for unanticipated expenses and costs that you might underestimate.

It's also a good idea to allow extra time for your business revenues to cover your expenses, so that you don't run out of cash and have to scramble for additional financing. For example, if you expect your business to be profitable after six months, use a timeframe of nine or ten months to allow for the unexpected.

Average Costs to Start a Small Business

As we've shown, there's no easy answer for determining the cost to start a small business, but you can find research on the average cost to start a small business by industry. Here are some examples:

• Ecommerce retailers spend an average of $40,000 in their first full year of business, according to ecommerce platform Shopify. Ecommerce businesses with no employees spend an average of $18,000 in their first year.
• Average restaurant start-up costs range from $275,000 to $375,000, depending on the size and type of restaurant, according to accounting software developer Sage Accounting and Bankrate, a service that provides tools and resources for financial management.
• A fitness gym's first year expenses can range from $50,000 for a cycling studio to $1 million for a full-service fitness center, according to Sage Accounting.

Determine Whether You'll Need Outside Funding

Add up your expenses by month and subtract the total from the cash you have available. If the result is a deficit, you'll need to identify outside funding sources.

Some options include:

• investments from friends and family
• a bank loan or line of credit
• investments from business partners like vendors
• equity investments from venture capital companies

Loans and investments from outsiders typically include fees and interest. Venture capital investors will require you to be a corporation, which many small businesses will find burdensome (most are sole proprietorships or LLCs). Make sure you include those expenses in your startup budget.