How much does it cost to start a business?

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Page written by Chris Godfrey. Last reviewed on October 15, 2024. Next review due October 1, 2025.

Starting a new business can be the beginning of a great new adventure. However, like most journeys, you can’t get there for free. On average, it costs $40,000 to start and run a new business in its first year. However, this figure can vary enormously depending on your type of industry, type of business, and the goods or services that you sell.

Let’s take a closer look at typical business start-up costs and what you can do to keep them to the minimum.

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How do I calculate start-up costs?

The first thing you’ll need is a budget that covers all the costs you can expect to incur to get to launch and then for the period where you build the business to profitability. Keep in mind that depending on the type of business you start, getting to the point where your profits are higher than your costs could take many months, or even a year or two.

Your budget should list every expected expense – basic items such as rent, wages, fuel, inventory, insurance, furnishings and signage – plus supplementary costs such as advertising, promotions, and social media. As you may expect, these costs can vary significantly depending on your key business factors.

Key factors that impact start-up costs:

Industry type: It costs a whole lot more to start a car dealership than a dog-walking business. If you’re starting on a shoestring, keep your ambitions within reason. Build a business that you know you can afford.
Business type: Online businesses will be easier and cheaper to launch than most brick and mortar stores. (Expect to spend anywhere from a few hundred dollars to $10,000 to build an effective ecommerce site). If you want to keep your initial costs very low, you’ll need a business that you can run from your home, garage or a small industrial unit and sell your goods or services online. This would negate small businesses such as hair salons or beauty parlors where a highly visible retail store is crucial for success.
Location: If you’re not launching an ecommerce business, where you operation is based will have major impact on your start up costs. Busy city centers and main street retail sites are far more expensive to buy or rent than rural or suburban locations.
Employees: If you’re not able to run the business on your own or with a partner, you’ll need staff to help you. Employee wages and benefits can be one of your biggest costs. According to the US Bureau of Labor Statistics, average hourly costs per employee (June 2024) was $46.21 and accounted for 70% of total employer costs.
Size of your business: Clearly, the bigger your business, the more it will cost to start – location expenses, running costs, wages, vehicle expenses, equipment and inventory all cost more as the scope of the business expands.
Inventory: The cost of what you sell will have major impact on your start-up costs. Stocking a store with expensive designer clothing will need a much higher initial investment than a business that sells beans and dry goods by the sack.
Production costs: If you’re starting a manufacturing business you’ll need to calculate the cost of raw materials and components. Once again, these expenses will vary depending on the products that you make.

What will I need to buy to start my business? Typical expenses:

Web hosting and website costs
Rental space for store/office
Utility deposits
Business furniture/equipment
Labor
Inventory
Basic technology
Insurance, license or permit fees
Advertising or promotions
Legal fees

How to plan for startup costs

Never launch a business without a plan to control your start-up costs. Basic steps to take include:

Start small

Even giant corporations like Apple started in a garage. Keep your goals within the realms of possibility. Starting small gives you the option to learn as you go, finetune what you sell, explore new markets and most importantly, make mistakes that won’t drive you into bankruptcy. If you can launch the business from your home – either by selling online or going out to customers (such as a plumbing or HVAC business) – you’ll save on commercial rent, taxes, build-out costs, insurance and more. If your home isn’t suitable as an operational space, explore low-cost options such as communal workshops/studios, or overflow space in existing businesses (such as garages or unused factory space). Don’t jump into a bigger store or workspace until you have revenues to pay the higher costs.

Understand what types of costs you’ll have

There are different types of costs involved in launching and running a business. Some are one-off, others are recurring. Some are essential, while others are more of a ‘like to have’ and not necessary to get your business started. Aim to keep your first year costs as low as possible. This may mean spending more on a few one-off costs (such as better technology) that will save you more down the road as you avoid costly maintenance bills and lost productivity due to equipment failures. If you can spare the cash, create a contingency fund that will cover at least three months of your essential overhead costs. This will give you some breathing room should your business encounter unexpected problems.

Project your cash flow

Cash flow is the lifeblood of any business, and poor cash flow is the most common reason that small businesses fail. Calculating what you will spend compared to what you think your business can earn is crucial and it’s the best way to spot looming financial issues before they become a crisis. The rule of thumb for creating your cash flow plan is to include all expenses, plus 10% for overruns, but be more conservative with income – especially if you’re launching an B2B organization where you get paid on invoice in 30, 60, 90 days or more.

Figure out your financing methods

If you don’t have deep pockets, where will you raise the funds to start your business? While 76% of US non-employer small businesses use personal funds to get going, that money may be limited and unable to maintain your enterprise until it is profitable. If that’s the case, you’ll need a business loan or other type of financing:

Business term loans: Business term loans are the most common type of business financing. You receive a single, lump-sum cash injection and then pay it back in regular instalments over a fixed period of up to 25 years. Collateral may be required.

Business line of credit: A business line of credit functions like a high-value credit card but comes with lower interest rates and fees. Organizations can withdraw as much as they want when they want from a loan facility up to the limit of their borrowing. This kind of loan is ideal for organizations that want maximum flexibility or for investment situations where the total cash required is unknown. Collateral may be required.

SBA microloan: Available from lenders who are part of the US Small Business Administration lender network, SBA micro loans can be obtained up to $50,000 in value. Designed for organizations that have difficulty accessing traditional business finance, SBA microloans typically come with more relaxed qualifying rules and can be obtained with FICO scores as low as 500, or even with no credit score at all.

Equipment financing: Equipment loans use the asset you’re financing as security, similar to a car loan or a residential mortgage. Use the equipment as you pay for it while the lender maintains a lien on the title to the machinery. Once you pay the loan back, the lender releases the lien, and you own the equipment outright. No added collateral required.

Business grants: Available from regional and local governments, non-profits, foundations and corporations, business grants are essentially free money, as you do not have to repay the cash if you spend it properly. However, be aware that business grants are highly competitive, typically slow to fund and may offer only a small portion of the funds you need.

How to get funding for my new business?

Obtaining business financing for start-ups can be slow and complicated. The sum you can borrow, the interest rate you’ll pay and other terms and conditions will vary from one lender to another. It therefore makes sense to shop around before settling on a deal. You can do this by approaching banks, credit unions and online lenders one by one, or you can use the services of a loan marketplace that can quickly introduce you to a choice of financing offers from a range of lenders. Some marketplace platforms can also give you advice and help you with the application process. This can be especially useful for borrowers who have never taken out a start-up loan before.

What are the different types of costs for your small business?

Business costs are classed in different categories:

Essential costs vs. optional costs

There are some costs that you cannot avoid in business. These are known as ‘essential costs’ and they include expenses such as rent, wages, energy and so on. Alternatively, ‘optional costs’ are what they sound like – expenses that are not critical to keep the business running. This would include things like luxury furniture and fixings, non-essential equipment, company outings and a corporate jet (just kidding). As a start-up you should focus on essential expenditures only and leave the optional stuff until your business is fully established.

Fixed costs vs. variable costs

Fixed costs are expenses that remain the same, such as monthly rent. Variable costs are expenses that can fluctuate, such as your energy bill.

Can I start a business with no money?

Even if you only need to buy a bucket, sponge and a ladder to start a window-cleaning business, you still need a few dollars to get you off the ground. In other words, it’s almost impossible to launch a new venture without spending something. However, you can limit the amount of cash you need by starting a business that requires minimal investment. Apart from window washing, here are a few business ideas that don’t cost much at all:

Translator: If you speak English plus a foreign language, you may be able to sell yourself as a translator for businesses or local government. All you need is a business card and a laptop to get you underway.
Personal trainer: Into fitness? Think you can help others to get in shape or lose weight? A personal trainer only needs some basic equipment and good networking skills to succeed. However, check to see if you need a special permit or license to operate in your state or city.
Web designer: If you have good technical skills and a good eye for imagery, a web designing business may be your low cost option. All you need is your computer and a wi-fi connection to get started.
Gardener: A lot of folks don’t need a fancy landscaping business to take care of their yard. General gardeners can be a better fit. You’ll need a vehicle, lawnmower, trimmer and few other basic tools – many of which you can buy in good used condition.
Personal chef: If you’re a handy cook, working as personal chef is a low-cost way to sell your services and far cheaper than opening a restaurant. You need a website that showcases good photos of your cooking, knives and some other kitchen tools, plus good networking skills to make this idea work.

How Swoop can help

It’s seldom easy to start a new business, but working with finance experts can make all the difference when you’re seeking funding. Contact Swoop to discuss your borrowing needs, get help with your application and to compare high-quality start-up loans from a choice of lenders. Get your new business up and running now. Register with Swoop today.

Written by

Chris Godfrey

Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.

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