Starting a business is a fairly common goal in the United States, with roughly 43% of Americans expressing entrepreneurial intentions[1]<\/sup>. But how much does it cost to start a business? You\u2019ll need to know before you get started.<\/p>\n<\/div>\n<\/div>\n If you\u2019d like to transition to self-employment, here\u2019s what you should know about how much it costs to start a business, why it\u2019s such an important issue to consider, and how to save up the funds you need.<\/p>\n Startup costs are a critical consideration for would-be business owners and should factor heavily into your early financial planning.<\/p>\n You need to know how much it costs to start a business to determine whether you can realistically do so. Some business models require more than you can afford, even with external financing, making them unattainable.<\/p>\n \ud83d\udc49 Learn more:<\/strong> Our guide on S.M.A.R.T. financial goals<\/a> offers a step-by-step approach to planning your finances effectively, illustrated with examples.<\/p>\n Others may be theoretically within your reach but require more capital than you\u2019re willing to risk. After all, roughly\u00a020% of businesses fail\u00a0within their first two years.<\/a> That goes up to around 45% over the first five years and about 65% over the first ten[2]<\/sup>.<\/p>\n You\u2019ll also need a fairly accurate estimate of your startup costs to effectively prepare for the transition to self-employment. You want to be confident that you can cover your business expenses for a period without much revenue.<\/p>\n Typically, you\u2019ll use that estimate to determine how much money you need to save up or gain access to through a credit account before transitioning to self-employment.<\/p>\n If they\u2019re substantial enough, your startup costs can even impact your business\u2019s finances over the long term. For example, if you get a 60-month business loan to purchase essential equipment, your profits will be lower for years due to the burden of servicing your debt.<\/p>\n For all of these reasons and more, knowing your business\u2019s startup costs is essential for making strategic business decisions, especially in the earlier days of your company.<\/p>\n \ud83e\udd14 Learn more:<\/strong> Torn between employment and entrepreneurship? Our post on whether to get a job or start a business<\/a> can help you decide.<\/p>\n The cost of starting a business can vary wildly depending on your business model. For example, you can begin offering many services without paying anything, but opening a manufacturing company is prohibitively expensive for the average consumer.<\/p>\n As a result, the average cost of starting a business isn\u2019t a practical measurement for gauging your own startup costs, even if you could calculate it. Instead, find a way to estimate the costs for your unique circumstances.<\/p>\n Let\u2019s explore some strategies you can use.<\/p>\n One of the best ways to estimate your startup costs is to study the expenses of existing operations like yours. While small businesses generally don\u2019t publish their financial data like public companies do, you can still find information on them.<\/p>\n Many small business owners who have achieved some success enjoy sharing their insights with those interested in following a similar path. As a result, you can often find interviews, podcasts, or articles online in which they discuss the details of their experiences.<\/p>\n Alternatively, you can contact experts directly and ask for their advice yourself. They might participate in and be willing to answer questions in forums and social media, or you can attend networking events and attempt to connect with them in person.<\/p>\n House flipping<\/a> is a popular real estate<\/a> business strategy that involves buying, rehabbing, and selling a property for profit. As you can probably guess, it\u2019s an expensive business plan, and estimating costs accurately is essential for success.<\/p>\n<\/div>\n<\/div>\n Fortunately, there are countless YouTube channels where flippers share the details of specific projects they\u2019ve completed from start to finish, including their numbers. There are also real estate meetups in virtually every city where you can mingle with other real estate investors, ask them questions, and look for a mentor.<\/p>\n It\u2019s generally more efficient to estimate your startup costs using someone else\u2019s historical expenses. However, the information isn\u2019t always readily accessible, and finding it can be more trouble than it\u2019s worth.<\/p>\n In that case, you can always create a budget for your company\u2019s startup costs from scratch. It might not be as accurate, but you can easily factor the unknown into your budget by giving yourself a healthy contingency fund.<\/p>\n Start by listing the expenses you\u2019re sure you\u2019ll have to pay to open your business. That\u2019ll serve as the foundation of your budget. Then, list all the costs you anticipate but aren\u2019t entirely sure about.<\/p>\n \ud83d\udcb0 Learn more:<\/strong> Explore 5 practical ways to get money to start a business<\/a> and kickstart your entrepreneurial journey today.<\/p>\n Finally, inform your estimates for each cost with market research. Shop around with different vendors and get actual quotes so your numbers are as realistic as possible.<\/p>\n Generally, the safest strategy is to use your most conservative budget. That would mean assuming your most pessimistic estimates are accurate and factoring in a cushion to account for your uncertainties.<\/p>\n Say you want to start a lawn mowing business. You know what you\u2019ll have to pay for equipment and transportation but aren\u2019t sure how much you\u2019ll need to pay for marketing and labor. To be safe, you include a conservative estimate of all the costs in your budget and factor in an additional 20% cushion to account for the unknown.<\/p>\n<\/div>\n<\/div>\n \ud83d\udca1 Free Resource:<\/strong> Monthly Budget Spreadsheet Template (Excel & Google Sheets)<\/a><\/p>\n Expenses vary significantly between business models, but some are more common than others. If you have to build a budget from scratch, here are some costs you should probably include in your projections, no matter what product or service you offer.<\/p>\n If you want to do business as a legal entity other than a sole proprietor, you generally have to pay fees to a governing agency in your state. In addition, you\u2019ll probably want to hire someone to draft documents like operating agreements or articles of incorporation.<\/p>\n Similarly, some businesses require that you purchase a license to offer whatever products or services you sell. Operate without them, and you risk incurring penalties or having your business activities shut down.<\/p>\n Finally, you\u2019ll usually need to pay for bookkeeping services to keep your financial records in order. Depending on your needs, that can be anything from a software subscription to a professional service provider.<\/p>\n Client acquisition is essential for every business, from real estate agencies to e-commerce<\/a> websites. Not all forms of marketing cost money, but many of the most effective ones do, especially those that work for new companies.<\/p>\n When drafting your initial budget, it\u2019s a good idea to leave some extra room in the marketing category since you can\u2019t predict whether your early strategies will be successful. You may have to experiment until you find something that works for you, which will cost more money.<\/p>\n If you want to sell something tangible, you\u2019ll inevitably have to pay for materials to create your final offering. That applies whether you\u2019re assembling your product from scratch or merely refurbishing previously used goods.<\/p>\n Material costs are often one of the most significant expenses for product-centered businesses and have a large impact on profitability. You want to ensure that your raw material costs are roughly equal to or lower than your peers\u2019 to compete effectively.<\/p>\n Small businesses often start as one-person operations, which can work well for many self-employed people. However, you must incur labor costs eventually if you want to scale things up.<\/p>\n Like materials, labor is often one of the more significant business costs. You may be able to reduce it by using independent contractors rather than employees, but hiring people consistently is always relatively expensive.<\/p>\n<\/div>\n<\/div>\n Whatever your business is, you\u2019ll often need space to conduct certain aspects of your operation. That could be an office to meet with clients, a storage unit to house your inventory, or even a factory to manufacture your products.<\/p>\n Assuming you can\u2019t or don\u2019t want to run your business out of your personal residence, you\u2019ll need to lease or buy a separate space. That means taking on monthly rent or financing payments and utility costs.<\/p>\n Businesses often need specialized equipment to offer whatever product or service they sell. That could be anything from a laptop computer for a freelance writer to a large commercial vehicle for a long-haul trucker.<\/p>\n Many of the most expensive business models are costly because the equipment they involve is expensive. If you pick a business that doesn\u2019t require you to purchase any significant fixed assets, there\u2019s a good chance you\u2019ll have affordable startup costs.<\/p>\n There are many types of business insurance, and it\u2019s likely that at least one will be beneficial to you, no matter what your business is. Some policies may actually be required, such as workers\u2019 compensation insurance when you have employees.<\/p>\n Some of the other most common types of business insurance include general liability insurance, commercial property insurance, and business income insurance. Many self-employed people buy a business owner\u2019s policy, which combines all three.<\/p>\n Labor expenses generally refer to the cost of hiring someone for ongoing help with your primary operation. In contrast, professional service fees go to external parties you contract to manage a secondary aspect of your business that\u2019s outside your wheelhouse.<\/p>\n You might hire a Certified Public Accountant (CPA) to do your taxes. Some other common professional service costs include fees paid to lawyers, information technology (IT) consultants, and marketing agencies.<\/p>\n<\/div>\n<\/div>\n Last but certainly not least, every business has to pay taxes<\/a> on their profits. In addition to income taxes, that also includes a flat 15.3% self-employment tax. It\u2019s the combination of the Social Security and Medicare taxes that employees get to split with their employees.<\/p>\n In most cases, it\u2019s best to hire a CPA for assistance with tax planning and preparation. You might be able to get away without one if your business is relatively simple, but as it grows in size and complexity, a CPA becomes increasingly valuable.<\/p>\n \ud83d\udcd7 Learn More:<\/strong>\u00a0Our latest post unveils 8 powerful ways how to save on taxes<\/a>, helping you keep more money in your pocket.<\/p>\n How much does it cost to start a business? If you\u2019re asking that question, you already understand the importance of anticipating and preparing for your startup costs.<\/p>\n Starting a business that requires upfront and ongoing costs is inherently riskier than working for someone else. If your company fails or goes without revenue, you stand to lose your investment and source of income while having lingering business bills to pay.<\/p>\n As a result, it\u2019s essential that you prepare your finances for self-employment by building a healthy runway of cash. The process isn\u2019t too different from saving up an emergency fund<\/a> to protect yourself as an employee.<\/p>\n Generally, this involves saving enough cash to weather the worst-case scenario. Just like it does for employees, that means having the funds to pay your bills during an extended period of little to no income.<\/p>\n However, there are several differences that mean your fund will probably need to be larger than the average employee\u2019s. They include the following:<\/p>\n You can reduce your need for a cash runway by maintaining a second source of income while you get started, but that means you\u2019ll have less time and energy to devote to your new business. There are pros and cons to both approaches, so consider carefully.<\/p>\n \ud83d\udcd7 Learn More: <\/strong>How to Start a Business While Working Full-time (And Replace Your Job)<\/a><\/p>\nWhy Startup Costs Matter<\/h2>\n
How to Estimate Your Startup Costs<\/h2>\n
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<\/figure>\nStudy Comparable Businesses<\/h3>\n
\nBuild a Budget From Scratch<\/h3>\n
\nCommon Costs of Starting a Business<\/h2>\n
Administration<\/h3>\n
\nMarketing<\/h3>\n
\nMaterials<\/h3>\n
\nLabor<\/h3>\n
\nOverhead<\/h3>\n
\nEquipment<\/h3>\n
\nInsurance<\/h3>\n
\nProfessional Services<\/h3>\n
\nTaxes<\/h3>\n
\nHow to Prepare Your Finances for Starting a Business<\/h2>\n
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