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Looking to start your own business? You’re not alone. Some 71% of Gen Z and millennials dream of being their own boss, according to a 2024 JustWorks/Harris Poll survey.
While launching your own business allows you plenty of professional freedom, it can also be expensive. As you’re creating your business plan, one question you’ll likely face early on is, how much does it cost to start a business?
The average small business owner spends around $40,000 in their first full year. But that amount can vary based on a number of factors, including the size, type, and location of your business.
Let’s take a closer look at the startup costs of different types of businesses and common ways to cover the expenses.
Key Points
• Starting a business involves various costs, with the average small business owner spending about $40,000 in the first year.
• Costs can vary significantly based on the business size, type, and location.
• Typical expenses include payroll, office space, inventory, and licensing fees.
• Funding options include personal savings, loans from friends and family, outside investors, and business loans.
• Effective planning and understanding of startup costs are crucial for setting a solid financial foundation.
Typical Small Business Startup Costs
The old adage is true: You have to spend money to make money. And unfortunately, some of the biggest business costs can come during the startup phase, when you are defining your business goals, finding a location, purchasing domain names, and generally investing in the infrastructure of your new company.
In order to make sure your business is on firm financial footing, it’s important to estimate your small business startup costs in advance. Here are some common ones to keep in mind:
Payroll
Many small businesses start out as a company of one. But if you’re planning on having employees, salary will likely be one of the biggest costs you’ll have. After all, offering an attractive pay and benefits package can help you recruit and retain top talent.
In addition to wages, you might also want to budget for other types of payroll costs, such as overtime, vacation pay, bonuses, commissions, and benefits.
Office Space
No matter what your business is, you’ll need somewhere to work. Are you leasing a storefront, or will you buy a membership to a coworking space or startup incubator? If you’re planning to work from home, consider whether your new business will increase your internet or utility bills.
And don’t forget about the supplies you’ll need to do the work. Depending on your business, this could include things like computers, phones, chairs and desks, paper supplies, or filing cabinets.
Recommended: Best Cities to Start a Business in the U.S.
Inventory
If you’re starting a business that sells products, you’ll need to have some inventory ready to go. Calculating stock as part of your startup costs ensures that you can buy your product in advance, so that you’re ready to serve customers from day one.
Licenses, Permits, and Insurance
Some businesses, especially storefronts and restaurants, require more legal legwork than others.
For example, if you’re starting a native-plants landscaping business, will you need a permit? If you’re starting a new bar, will you need a liquor license? Licenses and permits vary by city and state, but most require an application fee.
Likewise, your new business may need one or more insurance policies to protect you in case of future litigation, so be sure to factor in the cost of monthly premiums.
And don’t forget about the costs associated with registering your business. Whether you plan to set up shop as a sole proprietorship, corporation, limited liability corporation or other business entity, you’ll need to pay a nominal fee. The amount will depend on the state where you operate.
And if you plan on enlisting the help of a lawyer, accountant or tax professional to get your business up and running, add those potential costs to your budget as well.
Advertising
Getting the word out about your new business is one of the most important things you can do to ensure that business starts off strong. Whether you want to advertise on social media or rent a billboard, your startup costs should reflect money you plan to put toward taking out ads for your business.
Differences in Startup Costs Based on Industry
The actual cost of starting a small business can vary by business and industry. Here’s what you might be looking at if you want to start one of these common types of small businesses.
Online Business Startup Costs
As with brick-and-mortar stores, the cost of doing business online varies depending on the type of business you have. But in general, you’ll need to budget for things like:
• Web hosting service and domain name
• Web design and optimization
• E-commerce software
• Payment processing
• Content creation and social media
If you’re selling products, you will need to invest in inventory and shipping. If you’re providing services, you may need to hire employees. All of these costs can be significant.
However, one benefit of starting your small business online is that you may be able to keep other costs low. For example, if you can conduct business from home, you may not need to rent office space, which can be a major savings. If you’re able to do the work without purchasing inventory or hiring employees, the startup costs can be even lower.
Average startup cost: $2,000 to $20,000 or more (depending on your business)
Storefront Startup Costs
If your business idea requires a physical space, your startup costs might range from $50,000 to one million, depending on how large a store you’re planning and what the stock will be. A medium-sized clothing store or boutique, for instance, might cost between $50,000 and $150,000.
Although $150,000 might seem like a daunting number, remember that many smaller, independently owned stores began with a much smaller budget.
Average medium-sized retail startup cost: $80,000-$150,000
Restaurant Startup Costs
If you’re betting on bringing in bank by selling your grandma’s famous bánh mì, you could be looking at startup costs of anywhere from $30,000 to $100,000 for a used food truck or cart to up to $2 million to buy a franchise restaurant. Typically, costs for small restaurants, including coffee shops, fall somewhere in the $275,000 to $425,000 range.
Average startup cost: $375,000
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How to Finance Your Startup Business
Many people who want to start a business are overwhelmed by the initial costs, but there are several ways to fund your passion project.
Friends and Family
Perhaps one of the most common ways to raise money for your small business is to ask friends and family to invest in you.
Friends and family loans can be ideal for financing a new small business because you can negotiate low-interest rates, set up flexible pay-back schedules, and avoid bank fees. Of course, borrowing money from friends and family can quickly become complicated by family drama, so make sure to agree on conditions before taking out a loan from a relative.
Outside Investors
When we’re discussing startup companies, we frequently hear about so-called “angel investors” sweeping in to fully fund new businesses. But there are other practical ways to fund your small business with outside investors.
Some small businesses use crowdfunding platforms to find investors who each contribute a small amount, and others use startup funding networks to find investors looking to fund their specific type of business. Outside investors will want to know that your business is likely to succeed, so you’ll need a solid business plan to land outside funders.
Personal Savings and Investments
Most people end up covering some of their small business startup costs out of their own personal savings. Self-funding your new business venture can be the most convenient option. After all, if you’re your own funder, you don’t have to worry about family drama or picky investors. And putting your own money on the line can be an extra motivation to make sure that your business is set up to succeed.
Of course, it can seem overwhelming to save up enough money to fund your small business. Luckily, there are simple strategies to effectively manage your money.
Business Loans
If you’re looking to purchase equipment, buy inventory, or pay for other business expenses, a business loan might make sense for you.
There are various types of small business loans available, each with different rates and repayment terms. Note that in some cases, lenders may be reluctant to give loans to a brand-new business. You might need to put up some type of collateral to qualify for funding.
You may be able to get a loan from the U.S. Small Business Administration. SBA loans are partially backed by the government and often come with more advantageous terms than other loans, though they may require more paperwork upfront.
Recommended: Business Term Loans: Everything You Need to Know
Personal Loans
A personal loan can be used for just about any purpose, which can make it attractive for entrepreneurs who want to turn their passion project into a reality. These loans are usually unsecured, which means they’re not backed by collateral, such as a home, car, or bank account balance.
Personal loan amounts vary. However, some lenders offer personal loans for as much as $100,000. Most personal loans have shorter repayment terms, though the length of a loan can vary from a few months to several years.
While there’s a great deal of latitude in terms of how you use the funds, you might need to get your lender’s approval first if you intend on using the money directly for your business.
Recommended: How to Get a Small Business Loan in 6 Steps
The Takeaway
Going into business for yourself can be personally and professionally fulfilling. But it can also be expensive, especially if you’re starting from scratch. Estimating your startup costs early on can help ensure you’re on solid financial ground from the get-go. Labor, office space, and equipment are among the biggest expenses facing many entrepreneurs, but there are smaller fees and charges you’ll likely need to consider.
Fortunately, small business owners have no shortage of options when it comes to covering startup costs. Dipping into personal savings and asking friends and family to invest are popular choices. Taking out a business loan or personal loan is another way to help finance a new business. The money can be used for a variety of purposes, and that flexibility can be especially useful when you’re just starting out.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
Is $10,000 enough to start a business?
In many cases, $10,000 can be enough money to start a business with, depending on what kind of business you have in mind. You may be able to open a business with low overhead (like some e-commerce options) or a service-based company, offering lawn care or tutoring, for example.
How many months of expenses should a business have?
As a general rule, a small business should ideally have three to six months’ worth of expenses available in liquid form to cover costs in case of slow seasons or emergencies.
Can I run an LLC out of my home?
When you’re just starting out with your business, running it out of your home may be a good option (depending on the kind of business). You can specify when you think that it would be viable to move the company to a separate location in your business plan.
Photo credit: iStock/Wavebreakmedia
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