Average Cost Of Starting A Small Business

ferrantraite/ Getty Images; Illustration by Austin Courregé/Bankrate

There are many out-of-pocket expenses when you launch a new business. Depending on your industry, products or services and location, your startup funding needs could be as little as $100 for an online business to as much as $750,000 for a restaurant.

While that’s a wide range, you can narrow it down by listing out all your expected expenses and their estimated cost. Let’s take a look at some average costs of starting a small business in various expense categories so you can use realistic numbers.

Key small business cost statistics

• On average, small business owners spend $40,000 in their first full year. (Shopify)
• The business formation fee (initial incorporation filing fee + report fees needed to maintain an LLC) is the least expensive at about $50 to $500. The most expensive cost can be equipment, typically $10,000 to $130,000. (Stripe, FreshBooks)
• 77 percent of startups without employees used personal funds to finance their business (Fed Small Business)
• The top financial challenges for nonemployer startups are increased costs of goods, services and wages, and handling operating expenses and uneven cash flow. (Fed Small Business)
• Average hourly pay for an administrative assistant is $22. (Salary)
• Average cost to build a website using a website builder is $120 to $360 per year. (WebsiteBuilderExpert)
• Average cost of adding a new employee to your payroll usually ranges from $4,000 to $20,000, not including employee salary and benefits. (Indeed)

How much does it cost to start a small business?

New businesses spend an average of $40,000 in their first year to launch their company. Your actual costs will vary depending on:

• Business size
• Location (physical or online)
• Number of employees
• Cost of inventory
• Cost to produce goods, such a labor and raw materials

As your business grows, you’ll need to be strategic about keeping costs low and opting for the most affordable materials for the best return on investment.

Online business vs. brick-and-mortar stores

Whether you have a physical location or an online-only presence plays a significant role in determining your overhead costs. For example, a custom online store could cost you around $2,000 to $20,000 to build, depending on whether you have a leaner or more robust business model. On the other hand, a brick-and-mortar store costs an average of $147 per square foot just to design and arrange the store to fit your needs. On a 500-square-foot space, that’s $73,000. And you probably still need a website.

Employee payroll or contractor services

Employees are another big expenditure. According to the Bureau of Labor Statistics, the average non-government employee costs your business $44.40 to $46.84 per hour.

Given that there are 2,080 working hours in a year, the average employee may cost you roughly $92,000 to $97,000 per year, based on the Bureau of Labor Statistics wage. So if you have five employees, you’ll have to project for $460,000 to $485,000 in costs.

Another way to calculate total employee costs is to budget for their salary, employee benefits and taxes. The U.S. Small Business Administration (SBA) suggests estimating employee costs to be 1.25 to 1.4 times their salary. Using that information, an employee with a $50,000 annual salary would cost between $62,500 and $70,000.

Average cost by industry

Average startup costs vary greatly depending on the field or industry you’re tapping into. Your industry will shape your business model, inventory needs, marketing strategy and costs to produce your goods or services. Here’s a closer look at a few industry averages:

Types of costs for your small business

While it’s possible to fund your business with little to no upfront costs, you will likely encounter many expenses along the way. You’ll want to gauge whether your costs are essential to running your business or an expense that you can hold off until the business is established.

Essential costs vs. optional costs

Although you can delay or do without some expenses, others are unavoidable from the start. Here’s a general idea about where expenses fall:

Fixed costs vs. variable costs

Some of your expenses won’t change from month to month. Others will vary, coming up once or occasionally throughout the year. Plan ahead to ensure that you have enough funds to cover all of your necessary fixed and variable costs.

[Note: Common fixed costs column is mysteriously missing on the webpage, but shows up when copy/pasting the content]

Average small business costs

Whether you’re starting from scratch or expanding your business, you should be as detailed as possible about the business costs and the amount you expect to spend. Having an organized business budget can help you plan for these costs and account for any revenue changes that come your way. Here’s a look at how much you can expect to spend on your fixed and variable costs.

Average fixed costs

Average variable costs

How to save on costs and fund your startup

Consider trimming your overhead to make your startup costs 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. Any business can take a hard look at business expenses and cut costs that aren’t necessary to the business’s immediate success.

Business owners can also apply for a startup loan that provides the on-hand cash needed to make products or expand operations. Many business owners take advantage of low-interest SBA loans or business loans from a traditional bank or online lender.

Finally, consider applying for a business credit card to help you cover your costs. Business credit cards typically have fewer eligibility requirements, focusing on your personal credit score when you apply. Similar to personal credit cards, business credit cards don’t charge interest if you pay your statement balance in full before the end of each billing cycle.

Next steps

Understanding the costs of starting and running a small business is essential to starting your business off on the right foot. With a clearer picture of potential expenses, the next step is to create a detailed business plan that outlines your financial needs, identify areas where you can save, and explore funding options like loans or credit cards to support your growth. You can position your business for sustainable growth and success with careful planning and strategic financial decisions.

Frequently asked questions

• How do you calculate start-up costs?

  Here’s what you need to do to calculate your startup costs:

  1. Identify which costs we mention apply to your business and the other expenses that might be relevant.
  2. Estimate how much you think you’ll spend on each expense.
  3. Break the list up into one-time and monthly expenses.
  4. Add up all the expenses

  You can use a spreadsheet or startup cost calculator to help you. You should include your monthly expenses as part of your startup costs because you’ll still need cash for these items when you open your business. However, separating them on your list is a great way to get a feel for your overhead expenses.

• What do I need before starting to spend money on a start-up business?

  You’ll need a business plan and a way to raise capital. Once you’ve decided what your business will be, you’ll need a plan for raising the money to fund your startup costs and investing 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.

• What are additional considerations?

  When opening a business, it’s important to understand the tax burden that comes with ownership to avoid major financial surprises later on. Consider hiring a tax professional who can ensure you know all the taxes and fees you’re responsible for and an accountant who can advise you on the best legal structure for your business. Getting the foundation right can save you untold amounts in taxes later.Other aspects to consider include what technology and supplies you’ll need and where to source them. Also, review local business and zoning regulations to make sure you won’t have issues with fines or violations.

• How do I start a small business?

  The first step to starting a small business is choosing, understanding and refining your business concept. You’ll want to start by conducting market research to understand the market and your competitors and test the viability of your business idea. From there, you can create a business plan and work your way through these other business to-dos:

  1. Funding your business
  2. Registering your business
  3. Getting an employer identification number (EIN)
  4. Opening a business bank account
  5. Applying for necessary licenses and permits
  6. Creating a plan for hiring and managing employees