Starting a business is exciting and rewarding. But determining how much everything will cost can be challenging, as can finding those funds. A Shopify survey of 300 small business owners and 150 aspirational entrepreneurs in the U.S. found that they spent, on average, $40,000 in the first year of business. But every business is unique, and costs will vary depending on the type of business, geographic location and the business owner’s financial situation. 

Let’s take a look at some common startup costs and potential financing options to help transform your business idea into a reality. 

7 Expenses to consider when starting a business

Launching a new business can involve a variety of startup costs. Having a clear idea of what kind of expenses may come up is important for securing adequate capital and managing your cash flow.

Here are some typical expenses to have on your radar before opening up shop. 

1. Real estate and utilities

Unless you’re running your business from your home office or workspace, leasing or buying real estate can be a major factor in your business’s startup costs. Lease agreements may require you to pay a security deposit and multiple months of rent upfront. If you’re planning on buying a space, a down payment on a commercial property typically ranges from 10% to 30%, depending on the lender. 

In either case, you may also want to factor in the fact that even businesses that rent space are often responsible for paying for their utilities, such as electricity and natural gas. In 2019, the average monthly utility cost for commercial properties in the United States was $647.61. 

To put it another way, commercial building owners spend an average of $2.14 per square foot on utilities. 

2. Equipment and supplies

Practically every business needs some form of equipment and supplies to operate. This can range from office essentials like a printer and laptop to heavy-duty manufacturing machinery, depending on the type of business. 

Equipment is usually a one-time expense, but it can take up a large portion of your startup costs. Leasing rather than buying more expensive equipment can help spread out your business costs over the longer term, letting you retain startup funds for other important expenses. 

Supplies, however, may need to be purchased on an ongoing basis. Buying wholesale or in bulk may help lower the per-unit cost of supplies.

3. Licenses and permits

Depending on the nature of your business, payments for licenses and industry-specific permits may be necessary startup costs to keep you compliant with laws and regulations. Certain business activities, including agriculture, producing alcohol and transportation, require that you apply for federal permits. Before launching, businesses may also need to acquire and pay for licenses and permits on the state, county and municipal level. 

The business structure you choose can impact the registration process and associated costs, too. Some common legal structures include sole proprietorship, limited liability company (LLC) and corporation (c-corps). Each carries different requirements and related expenses. 

4. Insurance

You’ve probably purchased insurance to cover your health, home, and vehicle. Business insurance can also protect a business owner and his or her assets, employees, customers, and other liabilities. Business owners often purchase general liability insurance, which protects against third-party injury and property damage claims. The cost of a policy varies based on how risky the specific industry is. 

Once you hire one or more employees, you’ll also need to start paying workers’ compensation insurance. Other common insurance types include business property insurance and product liability insurance. 

5. Inventory

Typically, businesses that sell physical goods, like retailers, restaurants and manufacturers, actively maintain an inventory of products or the materials needed to make them. For startup businesses, building up an inventory beforehand can help serve customers and generate cash flow immediately. Once your business is operational, keeping up inventory is a balancing act that can affect your bottom line.

On one hand, not having enough inventory could hurt sales due to your customers having to backorder goods. On the other, having too much inventory presents the risk of damaged or expired items, as well as challenges selling low-performing products. 

The ideal threshold for how much inventory to keep in stock will vary based on factors like what industry you’re in, seasonality, historic customer demand, and the time it takes to order from suppliers. A rule of thumb, you may see is that small businesses should expect to spend between 17% and 25% of their budgets on inventory, though  they may need to spend a bit  more when they’re first starting up. 

6. Website and technology

Free social media platforms like Facebook and Instagram can be useful for engaging with customers and developing a brand identity. However, paying for a website and domain name may be advantageous for integrating a point-of-sale (POS) system for online transactions and providing more detailed information for customers and clients. 

Bear in mind that for many new businesses in need of cash flow, e-commerce growth represents an opportunity to quickly grow a customer base and sell products before acquiring a storefront. According to the U.S. Census Bureau, e-commerce sales in the retail industry have grown from 0.6% in 1999 to 16.1% in 2020. 

Other technology, such as payroll and accounting software, are common expenses businesses pay for to streamline operations. 

7. Advertising and marketing

New businesses may also want to invest in promoting their products or services to attract customers and clients. Small businesses may typically spend around one percent of their revenues on advertising, although recommendations sometimes run slightly higher, especially during the starting up stages. 

Traditional strategies, such as flyers, radio commercials and newspaper advertisements, can get the word out, especially in smaller communities. Social media ad targeting is another option to consider for businesses focused on specific audiences (age, gender and so on) or geographic region. 

If you don’t have the time or the knowhow to finetune your advertising strategy, you can contract with consultants to get support on more complex marketing tasks, such as graphic design and website search engine optimization (SEO).

Calculating how much it costs to start a business

So how much will it cost to start your business? The answer can vary greatly, depending on your priorities and business model, among other factors. After you determine which expenses are essential, creating a budget for six months or more of your small business startup costs may offer some clarity. 

Differentiating between one-time and ongoing expenses is key. One-time costs include obtaining assets like equipment or machinery but may also involve licenses or permits for certain businesses. 

These costs usually occur during the startup phase or when a business expands. Expenses that must be paid monthly or periodically (like quarterly) represent ongoing costs. It can sometimes also be helpful to further sort ongoing costs into fixed and variable costs to calculate how much money you’ll need to start your business. Fixed costs, such as rent and insurance, are consistent from month to month and can be easily projected in your business’s operating budget. 

Variable costs, however, will fluctuate according to factors like output, production or consumption. For example, the more energy your business uses, the higher its utility bill will be. If you have a store, you may have to pay different prices to heat and/or air condition it, depending on the time of year and the weather.

Sample small business startup costs budget

So let’s take a simplified example, which doesn’t get into fixed vs. variable costs. We’ll say that you’re opening up a small coffee shop. You would have two lists, one for one-time costs, the other for monthly costs. They  might look something like the following:

One-time costs

1. Deposits:

• Security deposit and first month’s rent: $4,000
• Utility deposits: $500

2. Improvements/equipment:

• Coffee prep and brewing equipment: $2,000
• Cups, mugs, dishes, bowls, utensils: $500
• Tables and chairs: $2,000

3. Inventory:

• Beverages: $1,000
• Food: $1,000

4. Miscellaneous:

• Licenses and permits: $500
• Legal fees: $500
• Tech/software: $1,000

Total one-time costs budget: $13,000

Monthly costs

1. Physical space:

• Rent: $2,000
• Utilities:   $500
• Property Insurance: $250

2. Employees:

• Payroll: $6,000
• Payroll taxes: $2,500
• Health insurance: $1,300

3. Professional Services:

• Accounting: $450

4. Supplies:

• Operational inventory: $1,000
• Office supplies: $250

5. Marketing/Advertising:

• Digital advertisements: $350
• Promotions: $450
• Website upkeep: $100

6. Miscellaneous:

• Liability insurance: $400
• Repairs/maintenance: $200

Total monthly costs budget: $15,750

Adding together your two lists, you would arrive at a total of $28,750 as your startup cost.

When to consider small business loans

If you don’t have enough money in savings to pay for your startup costs, you may want to think about small business funding. When considering different types of business loans, it’s important to weigh how interest rates, repayment terms and other factors will affect your business’s bottom line. Here are a few popular types of funding.

1. Term business loans

One type of financing that may appeal to startups is traditional term business loans. In this kind of funding, a traditional brick-and-mortar bank loans you a set amount of money which you pay back in regular installments, with interest, over time. A short-term loan typically has a term that can vary from a few months to as much as 18 months while long-term loans tend to be between three and 25 years.  

Most likely, a short-term business loan may be more appealing to most small business owners than than a long-term business loan. Short-term loans are generally easier to qualify for than longer-term loans (because the risk to the lender is perceived as less, due to the short term) and are often funded quickly. Longer-term loans may have lower interest rates but typically are harder to qualify for. 

The downside of short-term loans is that they can involve relatively high interest rates (often between 8% and 13%). They also typically come in smaller amounts than larger loans, which borrowers usually have more time to pay off.

2. Online loans

Loans from an online lender may look very similar to short- or long-term loans from a more traditional brick-and-mortar bank. But online loans do have some specific qualities that may make them appealing to startup businesses. 

For example, they tend to have less stringent requirements, which may benefit new businesses that haven’t yet built up a credit history. They’re usually easy to compare with other online options, and often, you can get the funds quite quickly. 

Potential downsides to these loans are that they may ultimately be more expensive than conventional loans (if you can qualify for them). And if you want personal interaction and support, it may be less available than it could be from your neighborhood bank, too.

3. Small Business Administration (SBA) loans

Small Business Administration (SBA) loans are a popular funding source because they can offer competitive interest rates, down payments, and terms for qualified borrowers. The Small Business Administration guarantees a portion of SBA loans, meaning that lenders will be repaid by the federal government in the event a borrower defaults. 

This reduction in risk may allow for more favorable terms, but getting an SBA loan can be challenging and time-consuming, especially for a brand-new business. 

If you can qualify, however, there are some situations in which small businesses could benefit from specific SBA loans, including the following.

1. Covering a wide range of startup costs

SBA 7(a) loans can be used for a variety of small business startup costs, including working capital, inventory, new equipment and payroll. The maximum funding amount for Standard 7(a) loans is $5 million, whereas SBA Express and 7(a) Small Loans are capped at $350,000.

Small businesses with lower capital requirements may prefer a SBA Microloan. Borrowers must work with a non-profit intermediary to access up to $50,000 in flexible funding to cover supplies, equipment, working capital and other startup costs. 

2. Paying for facilities and capital projects

Fixed assets, such as buildings, property, and machinery can be major business costs that often require long-term business loans. With fixed interest rates and repayment terms of 10 to 20 years, SBA 504 loans are designed for these larger investments and startup costs. Borrowers have to pay 10% of the project cost, while the lender and Certified Development Company provide up to 50% and 40%, respectively. 

Eligible expenses with a SBA 504 loan include existing buildings, long-term equipment, and the construction of new facilities and infrastructure.

The takeaway

One in five businesses doesn’t survive its first year. Planning ahead to calculate and budget startup costs can help you avoid this fate and set your new business up for success. Many small businesses use a combination of funding sources. 

Besides the loans detailed above, businesses may want to consider supplementing capital through government small business grants, crowdfunding and potentially even personal loans to cover startup costs. 

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