Starting a new business involves various business startup costs that can significantly impact its success. Understanding these expenses beforehand is crucial for entrepreneurs to ensure proper financial planning, avoid unexpected financial strain, and increase the likelihood of long-term profitability.
Dreaming of escaping the monotony of a 9 to 5 job and building your own business empire?
You’re not alone.
A staggering 60% of Americans say they want to start their own business, fueled by the desire for autonomy and the potential for financial freedom. But turning that dream into reality involves more than just inspiration and a catchy name—it requires meticulous planning and a clear understanding of the costs and risks associated with the unique financial landscape of the US.
Did you know?
On average, new entrepreneurs can expect to spend around $30,000 to $50,000 in their first year of operation.
You can be an aspiring entrepreneur ready to bring your idea to market, but as you go into the details, the daunting volume of small business expenses—from legal fees to operating expenses—quickly becomes apparent.
So, what do you do to ensure your business doesn’t end up as one of the 82% small businesses that fail?
You read this blog. Let’s cut to the chase!
14 types of business startup costs you need to consider
To ensure your startup thrives, it’s crucial to have a comprehensive grasp of the startup costs you’ll encounter. From initial setup expenses to ongoing operational costs, understanding these financial demands will help you plan effectively, budget wisely, avoid unexpected pitfalls, and keep your business on solid ground right from the start.
1. Market research
The U.S. Bureau of Labor Statistics (BLS) suggests that about 20% of new businesses fail within their first two years. There are many reasons for this, but a common thread is the lack of proper market research.
Imagine having a brilliant business idea and diving right in without considering your competition, target market, or the future potential of your products or services in the location you want to operate in.
You invest all your capital, time, and energy into it, only to find it doesn’t yield the results you hoped for. Perhaps the market was already saturated or your offering wasn’t suitable for the market, perhaps you lacked a unique selling point, or perhaps your product was simply ahead of its time.
Consider the Apple Newton, a classic example of a product ahead of its time. It was an early PDA that promised to take notes, store contacts, and translate handwriting to text. However, its rushed release and poor handwriting recognition led to widespread ridicule.
That’s why conducting thorough market research is essential for understanding your target audience, competitors, and market trends. This research forms the backbone of your business strategy, helping you make informed decisions about product development, marketing, and sales.
Accurate market research allows you to identify your potential customers’ needs and preferences, assess the competitive landscape, and determine market opportunities. In the competitive US market, this insight is invaluable for positioning your business effectively and ensuring your offerings meet the demand of the particular American demographic you’re targeting.
The cost of market research can vary widely depending on the scope and method. Hiring a market research firm can range from $5,000 to $15,000, depending on the depth and breadth of the research required. For startups on small businesses on a tighter budget, using online survey tools and conducting focus groups independently can reduce costs to between $500 and $3,000.
2. Borrowing costs
Once you have done your market research and identified that your business idea is indeed a lucrative one, the next step is acquiring capital. For most small businesses or startups, this typically involves taking out a loan, which comes with its own set of costs.
Understanding borrowing costs is crucial as these will impact your business’s financial health. Properly managing these costs ensures you can maintain liquidity and avoid financial strain. In the US, where small business loans are a common funding source, knowing your financing options and associated costs can make a significant difference.
The main borrowing costs include interest payments, loan origination fees, and potential late payment penalties. Depending on your business needs, there are various types of business loans available, each with its own interest rate range.
Here’s an overview of what you can expect to pay in interest for different types of business loans:
Loan type | Interest rate |
Term loan | 7.71% to 8.98% |
SBA loan | 11.5% to 16.5% |
Line of credit | 7.43% to 9.18% |
Invoice factoring | 25% to 200% |
Merchant cash advance | 35% to 350% |
3. Insurance, licenses, and permits
Your funding has been acquired, and your business is ready for the launch. But before you can formally begin, you need to obtain the necessary insurance, licenses, and permits required to operate legally and protect your assets.
Depending on the nature of your business, certain types of insurance may be legally required to fulfill contractual obligations. For instance, workers’ compensation insurance is typically mandatory if you have employees.
There are multiple reasons why insurance is a vital component of your expenses, but the most significant one is that insurance safeguards you and your employees in case of unforeseen circumstances.
Imagine you own a restaurant that suffers a fire and must close for repairs. With business interruption insurance, you can cover ongoing small business expenses and continue paying employees until reopening.
Additionally, property insurance would protect you from financial losses if a kitchen fire damages equipment or the building. Without this coverage, replacing or repairing these assets could be financially devastating.
General liability insurance typically costs between $400 to $800 per year, depending on the nature and size of your business. This insurance protects you from claims related to property damage, bodily injury, and personal injury.
Your small business also needs various licenses and permits to operate legally. For example, a restaurant needs health permits, while a construction company might need building permits.
The costs can vary widely; a basic business license might cost around $50 to $500, while industry-specific permits can range from $200 to $1,000 or more. The cost can vary based on your business status, such as C Corp, S Corp, or LLC, and your state.
Make sure to refer to the cost set by the government to identify the court license cost associated with your business.
4. Technological expenses
Technological investments are essential for almost any business and cover a broad range of needs, from hardware to software.
Imagine searching for a service online and finding that the provider doesn’t have a website. It might seem untrustworthy or less professional, right? That’s why a professional website is essential for most businesses today. No matter what products or services you offer, a website boosts your online presence and establishes your credibility as a legitimate business.
Website development can cost around $2000 to $50,000, including annual site maintenance costs, depending on the complexity and functionality. Using platforms like Wix or Squarespace can reduce these costs, with monthly plans starting at $16 to $159.
Apart from a website, you will need some tools for your day-to-day operations. Essential business software includes accounting software, customer relationship management (CRM) tools, and point of sale (POS) systems.
For instance, QuickBooks for accounting might cost around $76 per month, while a CRM tool like HubSpot can range from free to several hundred dollars per month, depending on the features.
5. Office space
Operating a business remotely can significantly reduce overhead costs. However, not all businesses can function this way. For example, manufacturing plants, hospitals, and restaurants typically require specific locations to operate. These types of businesses must plan for the associated costs of an appropriate workspace. The type and location of the office space will greatly influence the cost.
Renting an office space can range from $4,000 to $40,000 per employee annually, depending on the location, the quality and size of the office space, and local market conditions.
Purchasing office space is a substantial investment, often requiring a down payment of 10% to 25% of the property’s value. Additionally, you will incur costs for maintenance, utilities, and property taxes.
Many startups initially operate from home to save on costs. However, as the business grows, having a dedicated workspace can improve productivity and professionalism.
6. Equipment and supplies
For a small business that operates on-site, necessary equipment might include computers, printers, machinery, or vehicles.
For example, a restaurant needs commercial kitchen appliances, which can cost between $10,000 and $50,000. Office-based businesses might need computers and printers, costing around $1,000 to $5,000 per workstation.
Office supplies such as paper, pens, and printer ink are a common part of ongoing small business expenses. Depending on the size of the business, these costs can range from $500 to $2,000 annually.
When starting out, consider leasing expensive equipment to conserve initial capital. Leasing can provide flexibility and lower upfront costs, but buying equipment might be more cost-effective in the long run.
7. Inventory
For businesses that sell products, inventory is a critical startup cost. Inventory management involves determining how much stock to purchase without overextending financial resources.
The cost of initial inventory can vary widely based on the product type and quantity. Depending on the product line, retail businesses might spend between $10,000 to $100,000 or more on initial stock, while smaller online businesses might start with $5,000 to $10,000 worth of inventory.
Additional costs include storage solutions, such as renting a warehouse or using fulfillment services, which can range widely, depending on the square foot area, warehouse rental rates in your area, and operating expenses, such as electric, janitorial, water, internet, taxes, etc.
8. Marketing and promotion
Creating a buzz around your new business can be one of the most thrilling aspects of entrepreneurship. Plus, effective marketing is crucial for attracting customers and establishing a brand presence.
Investing in digital marketing can include search engine optimization (SEO), social media marketing, and pay-per-click (PPC) advertising.
Small businesses might spend between $500 to $10,000 per month on digital marketing efforts.
If you want to spend on traditional marketing as well, then you will have to consider the costs of flyers, brochures, and print ads, which can vary, depending on the scope and reach.
9. Employee expenses
You might think that hiring employees only involves paying their salaries, but that’s just the tip of the iceberg. Understanding the full scope of employee-related expenses is crucial for effective financial planning.
Your biggest expense will be employee compensation.
Depending on the role and industry, salaries can range from $30,000 to $100,000 or more annually per employee.
It’s important to pay your employees what they’re worth according to market standards to create a positive and productive workplace. And remember, hiring the right people is crucial. Trying to save money by hiring less skilled workers might seem like a good idea at first, but it can lead to bigger problems later on. So, make sure you have a solid budget in place to attract and retain top talent.
Beyond salaries, you’ll need to factor in additional costs such as benefits. Health insurance, retirement plans, and paid time off can add another 20% to 30% to the base salary. Providing these benefits is essential for attracting high-quality employees and maintaining a motivated workforce.
Don’t forget about the costs of recruiting and training new hires. Advertising job openings, conducting interviews, and onboarding new employees require time and resources. Moreover, investing in ongoing training and development is vital to keep your team’s skills up-to-date and aligned with your business goals.
Finally, consider the costs of employment taxes and workers’ compensation insurance. These mandatory expenses can further increase your total employee-related costs, but they are necessary to comply with legal requirements and protect your business.
10. Legal services
Engaging the professional services of lawyers is often necessary for navigating complex financial and legal landscapes.
Hiring a lawyer can help with drafting contracts, handling incorporation, and ensuring regulatory compliance can also add up.
Legal fees might range from $150 to $350 per hour. This fee can vary depending on various factors, such as the lawyer’s experience, the average hourly rate in your area, the complexity of specific jobs, and the size of form the lawyer works for.
11. Utilities and operational costs
Operational costs are the ongoing expenses that keep your business running smoothly. These costs can vary widely based on the nature and size of your business, but they are essential to consider for effective financial planning.
Monthly utility costs: Keeping the lights on and the internet running isn’t cheap. Monthly utility costs for electricity, water, gas, and internet can range anywhere from $200 to $10,000 or more, depending on the size of your office and your business needs. For instance, a small office with minimal equipment might have lower utility bills, while a larger office with high-powered equipment or multiple employees will have higher costs.
Day-to-day expenses: Beyond utilities, there are numerous day-to-day operational expenses to consider. This includes everything from office supplies like paper, pens, and printer ink to software subscriptions essential for business operations. Accounting software, customer relationship management (CRM) tools, and other digital tools can add up quickly. Budgeting around $500 to $2,000 annually should cover these needs, but it’s always good to keep an eye on these costs to avoid surprises.
Maintenance and repairs: Regular maintenance and occasional repairs are inevitable. Whether it’s fixing a leaky faucet in the office bathroom or updating outdated software, these costs are necessary to keep your business environment functional and efficient.
Miscellaneous costs: Unexpected expenses can arise at any time. This could be anything from replacing a broken piece of equipment to unexpected legal fees or additional marketing expenses. It’s wise to set aside a contingency fund to handle these unforeseen costs without disrupting your operations.
Staying on top of these operational costs is crucial for maintaining smooth business operations. By planning and budgeting for these expenses, you can avoid financial surprises and ensure your business runs efficiently.
12. Taxes
Taxes can be tricky, but understanding and planning for them is crucial for any business. Your tax obligations will depend on your business structure and the state you’re in.
For instance, corporations in the U.S. pay a flat 21% corporate tax rate. On the other hand, small businesses structured as pass-through entities can enjoy a 20% deduction on qualified business income.
Beyond income taxes, you might also need to consider sales tax, payroll tax, and property tax, depending on your business type.
To make sure you’re on top of all these obligations, it’s a good idea to work with a tax professional. They can help you stay compliant and optimize your tax planning, reducing your overall tax burden.
13. Miscellaneous costs
Unexpected expenses are inevitable in any business, but having a financial cushion can help you manage these surprises without disrupting your operations.
Setting aside an emergency fund, typically 10% to 20% of your total startup budget, provides a safety net for unforeseen expenses.
These unexpected costs might include repairs, unexpected legal fees, or additional marketing expenses. By budgeting for these contingencies, you ensure you’re prepared for any challenges that come your way.
14. Accounting and bookkeeping services
Keeping track of finances is crucial for any business, but it can be overwhelming to manage on your own if you’re a small business owner.
Imagine being swamped with day-to-day operations and trying to juggle your books at the same time. It’s easy for financial discrepancies to pile up, causing stress and potential legal issues down the road. This is where professional accounting and bookkeeping services can make a world of difference.
These services manage everything from recording transactions to preparing financial statements, ensuring that your financial data is always up-to-date and accurate.
The cost of accounting and bookkeeping services can range from $300 to $1,000 per month, depending on the complexity of your business’s needs.
CoCountant offers comprehensive bookkeeping and accounting services tailored to meet the needs of small businesses. With our team of experienced professionals, you can rest assured that your financials are in good hands, allowing you to concentrate on what you do best—running the small business you’ve always dreamed of starting.
The bottom line
Understanding business startup costs is crucial for you as a small business owner. It helps you plan effectively, allocate resources wisely, and ensure your venture’s stability and growth from the get-go.
As your business grows, staying on top of your accounting becomes more important than ever so you can keep your books balanced and make informed decisions about your business. However, managing these financial tasks while juggling multiple responsibilities and trying to cut costs can be challenging.
This is where finding a balance between quality and affordability is key. You need professional accounting services that provide comprehensive support without breaking the bank.
That’s where CoCountant steps in. Offering bookkeeping and accounting services at the lowest possible rates, our expert bookkeepers and accountants ensure every transaction is meticulously recorded, giving you a clear and accurate financial snapshot at all times.