Launching a small business almost always involves an initial investment. How much depends on many factors, from whether you operate entirely online or in a brick-and-mortar environment, to the type of industry you’re in and the products or services you offer. However, there are some good guidelines to help project those numbers.
Editorial insight
- On average, small business owners spend $40,000 in their first full year. (Shopify)
- The least expensive cost is the incorporation fee, which is around $145, while the most expensive can be equipment, typically $11,000–$125,000. (Forbes Advisor)
- The top source of funding for small business owners is personal savings. (GrowThink)
- Location and energy are the most unexpected costs in the first year. (Constellation)
- Average hourly pay for an administrative assistant is $21. (Salary)
- Average cost to build a website is $200 and costs $50 to maintain. (WebsiteBuilderExpert)
- Average cost of adding a new employee to your payroll is between roughly $4,000 to $20,000, not including the new employee’s salary and benefits. (Indeed)
Average cost by industry
Your average startup costs will vary greatly depending on the field or industry you’re hoping to tap into. Your industry will determine your entire business model, your inventory needs, your marketing strategy and your costs to produce your goods or services. Here’s a closer look at a few industry averages:
| Industry | Averages |
|---|---|
| Food and restaurants | $375,000 |
| Construction | $37,390 |
| Retail | $39,210 |
| Arts | $32,960 |
| Entertainment | $12,272 |
Types of costs for your small business
As great as it would be to launch your business with no upfront costs, you will likely encounter many expenses along the way. Some you can plan for but others will catch you off guard.
Essential costs vs. optional costs
Although there are some expenses you can do without or delay, others will be crucial and unavoidable right from the start. They vary tremendously by industry, but in general, they include expenses such as:
- Inventory
- Rent
- Website
- Payroll
- Marketing
- Technology
- Accounting
- Insurance
- Legal fees
So what can you wait on or avoid altogether? Optional start-up costs include:
- New, rather than used or leased, equipment
- Extra office space
- Luxurious business trips and entertaining
- Social media influencers
- A CPA when you can use accounting software instead
- Excessive inventory
Fixed costs vs. variable costs
You will find that some of your expenses won’t change from month to month. Others will vary, coming up once or occasionally throughout the year. Some expenses will change every month. To ensure that you have enough funds to cover all of your necessary fixed and variable costs, plan ahead.
- A business’s fixed costs often include:
- Rent
- Insurance premiums
- Property tax
- Essential workers salaries
- Internet and cell phone bills
- Loan payments
Your businesses’ variable costs may include:
- Packaging and shipping
- Raw materials
- Commissions
- Credit card payments and interest
- Travel
- Consultants
- Business entertainment
How much does it cost to start a small business?
Industry averages can help give you a general idea of how much you can expect to spend when starting a small business. However, your actual costs will vary depending on the size of your business, whether you’ll have a physical or online location, the number of employees, the cost to produce goods and more.
Often, your location and the amount of inventory you need will play a huge role in how much you pay to produce your goods at the necessary scale. As your business grows, you’ll need to be strategic about keeping your costs low and making sure you opt for the most affordable materials to see the biggest return.
One of the biggest differences you’ll find is whether you have a physical location or an online-only presence. For example, according to Best ECommerce Builders, monthly costs for a retail store can be between $2,000 and $4,000, while setting up a custom professional online store averages a one-time cost of $5,000 and the software can be as little as $29 per month.
Employees are another big expenditure. The Small Business Administration suggests projecting for an employee to cost 1.25 to 1.4 times the salary, so a person’s $35,000 salary will be $43,750 to $49,000. Therefore if you have five employees, you’ll have to project for a $245,000 cost.
Also, be aware that your location can also influence small business costs. A 2021 study conducted by Approve found Texas, Oklahoma, and Kentucky are the three cheapest states to run a business. California, New Jersey, and Vermont are the most expensive.
Average small business cost
While some start-up costs like the downpayment for your space are fixed, others like your taxes, payroll, or legal costs can fluctuate year over year. This is when having an organized budgeting system can help you plan for these costs and account for any changes that may come your way. Here’s a look at how much you can expect to spend on your fixed and variable costs.
Average fixed costs
| Fixed Cost | Average Amount |
|---|---|
| Rent | $2,500/month |
| Taxes | 30% of post-deduction income |
| Salaries | $41.03/hour |
| Insurance | $501/month |
| Depreciation | $1,600 item with a salvage value of $400. Can depreciate $1,200 of the cost over its lifespan. |
| Interest Payments | $110,000 loan, 5-year term 4.5%APR total interest $13,043.93 |
| Advertising/Marketing | 2%–5% of sales revenue |
| Incorporation Fees | $100 to $250 |
| Website | $200 to build, $50/month to maintain |
Average variable costs
| Variable Cost | Average Amount |
|---|---|
| Packaging Supplies | $1 – $5 per box |
| Credit Card Fees | 1.5% to 3.5% per transaction |
| Raw Materials | [could not find this data point] |
| Un-fixed Utilities | $2.10 per square foot |
| Inventory | 17%-25% of budget |
| Shipping Costs | $338/month |
| Sales Commissions | 20%-30% of sale |
| Office Supplies | $45 to $92/month |
| Travel | $1,293/trip |
How to save on these costs
Some of these averages might startle you, but many business owners take advantage of low-interest U.S. Small Business Administration (SBA) loans and small business credit cards to cover their start-up costs until they’re profitable and can cover expenses on their own.
If you decide to go this route, you’ll need to meet a few requirements. According to the SBA, eligibility for a loan requires you to be a for-profit business, do business in the U.S., have invested equity and have exhausted your financing options. Consider applying for a business credit card to help you cover your costs and they typically have fewer eligibility requirements.
You might also consider trimming your overhead to make your start-up costs a bit more manageable. Starting an online business is one way to reduce or eliminate office space and insurance costs, and save a little extra while you’re getting your business off the ground.
FAQ
The first step in starting any business is to figure out how much it will cost you to run it. Once you’ve decided what business you’d like to start, you’ll need to calculate what your profits might be and how that will grow over time. Start by conducting a break-even analysis to determine when your business will become profitable. Secure any funding you may need, then calculate what that loan will cost you over time in interest. Attract investors who may be able to provide you with large sums of capital upfront, and determine what the tax implications of starting your business will be. The SBA can help you crunch the numbers and get an estimate.
You’ll need a business plan and a way to raise capital. Once you’ve made your mind up about what your business will be, you’ll need a plan for how you’ll raise the money to fund your start-up costs, and then a plan for how you’ll invest those dollars to get the maximum return. If you need assistance, the SBA can help you find free counselors to walk you through each step.
When going solo, it’s important that you understand the tax burden that comes with owning your own business, so you don’t have any major financial surprises later on. Consider hiring a tax professional who can ensure you’re aware of all the taxes and fees you’re responsible for.
The first step is to understand and refine your business concept. In essence it should be something you enjoy doing as well as that you believe you can make a profit from. After that you will conduct research so you know the market and your competitors, then create a business plan. You will choose your business structure, which can be a sole proprietorship, LLC, or a corporation. Registering your business and obtaining the necessary licenses comes next. Then comes the financials. You’ll need to open a business bank account, take out credit products and business tools (such as a credit card processor to accept payments). Get business insurance, staff up (if you need employees) and start marketing!
