Small Business
Jun 7, 2024

How Much Does It Cost to Start a Business? [Explained]

A vital consideration when starting a business is the cost, which varies widely depending on the type of business, the industry, and the size of the operation.

According to the U.S. Small Business Administration, you may need $2,000-$5,000 to start a small micro or home-based business.

Also, keep in mind that starting a business requires an investment in both startup costs and ongoing expenses.

When you understand the nature of the costs associated with starting a business, you’ll find it easy to estimate how much does it cost to start a business?.

Let’s explore these costs and how you can manage them to reduce expenses.

Types of Costs When Starting a Business

The expenses in the initial stages of starting a business can be roughly divided into two cost categories: one-time costs and ongoing costs.

One-Time Costs

One-time, non-recurring, or startup costs are expenses that a small business incurs only once, or at least infrequently, during its lifetime.

These costs are usually associated with starting up a new business or launching a new service or product, and they’re not part of the company’s ongoing operating expenses.

One-time costs can be significant and should be carefully considered when creating a business plan or budget.

It’s important to understand the impact of these costs on a business’s finances, cash flow, and profitability.

One-time costs include registration, licenses, permits, equipment, research, brand design, etc.

Ongoing Costs

Ongoing, recurring, or operating costs are the regular expenses or cash flow a business incurs to keep its operations running smoothly.

Ongoing costs, as the name suggests, continue to be incurred on a regular basis throughout a given business’s life.

These recurring expenses are essential to a business’s success, as they represent the day-to-day business expenses required to keep the business operating efficiently.

Managing ongoing costs is essential for maintaining profitability and ensuring the long-term sustainability of the business.

Ongoing small business costs include rent, utilities, insurance, employee salaries, production, marketing, shipping costs, daily operations, unexpected costs, and other variable expenses.

Common Start-Up Costs in a Business

Here are the common business startup costs that you need to know as a business owner:

1. Research Expenses

Whether you’re trying to start a business with no money or have acquired a loan for your business venture, you must cover research expenses.

As a business owner, you must carefully research your industry, market, and consumers before engaging in a business venture.

Product and service businesses need research to develop their services and market analysis to understand how to penetrate the market.

Research is essential for business growth and development because it helps keep the business abreast of the industry.

It’s often the first cost incurred before registration and licensing.

Research costs are categorized as internal research costs and external research costs.

  • Internal research costs include research on employee remuneration, equipment and supplies, testing prototypes, and so on.
  • External research costs include outsourced research activities, professional training, consulting fees, and more.

2. Cost of Business Plan

Creating a solid business plan is an essential step when starting a business. Unfortunately and unwisely, many small business owners either ignore this or skimp on it.

While it’s possible to create a basic business plan on your own, it may be worth investing in professional help to ensure your plan is comprehensive and effective.

The cost of a business plan can vary depending on the complexity of your business model and the level of assistance you require.

To estimate the cost, you may need to answer the following questions;

  • Are you starting an online or brick-and-mortar business?
  • Are you focusing on attracting investors, local audiences, or international audiences?
  • Are you starting a small business or a large enterprise?

A basic small business plan may cost you anywhere from a few hundred to several thousand dollars. This may include research, financial projections, and marketing strategies.

More comprehensive business plans that require market research, competitive analysis, and detailed financial projections may cost upwards of $10,000.

A business plan isn’t always accounted for in small business startup costs, but it’s a necessary expense that ensures the viability and success of your business.

It’s important to weigh the cost against the potential benefits and consider the value of having a well-crafted plan to guide your business decisions.

3. Incorporation Costs (Business Insurance)

Incorporation fees are upfront costs for forming a legal business entity, such as a corporation or limited liability company (LLC).

They are a significant but necessary expense for startups to establish a legal business entity.

It protects your assets, like your personal savings, from business liabilities.

Budgeting for these costs is crucial, and seeking professional advice from a small business accountant ensures that your incorporation is done correctly.

Some of these incorporation costs are:

  • State Filing Fee: States have business incorporation filing fees that range from a few hundred to several thousand dollars.
  • Legal Fees: A lawyer or solicitor will ensure you have checked all the legal boxes. Their legal fees vary based on the complexity of the incorporation and the attorney’s hourly rates.
  • Business Name Registration: One of the criteria for identifying as a legal business in a state is registering your business name.
  • Business License and Permit: Depending on the nature of your business, you need to obtain various licenses and permits from the state or local government.

4. Marketing and Advertising

Marketing and advertising are essential elements of any successful business because they help promote products or services and attract customers.

Note: Marketing costs are especially high when running an online business.

Here are some of the common costs associated with marketing and advertising:

  • Market Research: Market research is essential to understand your target audience and the market trends.
  • Branding and Identity Design: This may involve creating a logo, web hosting and design, and other branding elements.
  • Advertising Campaigns: Advertising campaigns can be costly, especially if you use multiple channels such as TV, radio, billboards, social media, and online ads.
  • Content Creation: Creating high-quality content such as blog posts, videos, infographics, and social media posts is essential to engage your audience and drive traffic to your site. Tools like Venngage can be invaluable in this regard, offering user-friendly platforms to design stunning visuals that convey complex information in a digestible format.
  • Public Relations: Building and maintaining a positive reputation is vital for any business. You may need to hire a public relations agency or invest in software and tools to manage your public relations effectively.

5. Business Infrastructure

When starting a business, one critical factor that must be considered is the business’s infrastructure.

Business infrastructure refers mainly to the underlying systems, processes, and tools needed to operate a business efficiently.

They’re fixed, one-time expenses, regardless of your specific business type.

Here are some of the common costs associated with business infrastructure:

  • Office Space: If you plan to have a physical location for your business, the cost of renting or leasing office space needs to be factored in. You can skip this when running an online business since you’ll use your home as a personal workspace.
  • Equipment and Furniture: Depending on the nature of your business, you may need to invest in equipment such as computers, printers, phones, and other tools.
  • Software and Technology: Investing in software and technology is essential to operate a business efficiently. This may include purchasing licenses for accounting software, project management tools, and customer relationship management software.
  • Utilities and Services: Utility costs such as electricity, water, and internet should be considered.
  • Insurance: Investing in insurance is critical to mitigating risks associated with running a business. You may need to invest in insurance policies like liability insurance, property insurance, and workers’ compensation insurance.

6. Employee Expenses

Small businesses need to consider the costs of hiring and managing employees. Employee expenses are a critical component of any business, after all.

Here are some of the common employee expenses that aspiring entrepreneurs must consider.

  • Salaries and Wages: The overall cost of salaries and wages is one of the most significant fixed expenses associated with hiring employees.
  • Benefits and Perks: Offering benefits and perks like health insurance, retirement plans, paid time off, and bonuses can help attract and retain employees.
  • Payroll Taxes: Employers are responsible for paying payroll taxes, such as social security and medicare, and state and federal unemployment taxes.
  • Recruiting and Training Costs: Hiring and training employees can be expensive, and it’s important to factor in the costs. This may include expenses like job postings, background checks, training materials, and other costs.
  • Work-Related Expenses: Employees may incur work-related expenses such as travel expenses, office supplies, and equipment. Employers may need to reimburse employees for these expenses, so factoring them into your initial business cost is important.

Final Thoughts

While cutting corners and skimping on fixed or variable costs might be tempting, investing in the necessary resources, tools, and infrastructure is necessary to establish a strong foundation for your business.

For new entrepreneurs starting a home-based business with small business loans or launching a large-scale enterprise, being prepared and having a solid understanding of the costs involved can help you navigate the challenges and set you up for long-term success.

Startup expenses can vary greatly based on the type of business and industry.

So, it’s essential to consider all of the above-mentioned costs carefully and develop a detailed business plan to ensure you have adequate funding to launch and sustain your business.