8 Startup Costs That May Surprise You
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The cost of starting a business varies by industry, but there are some common expenses that every business can expect — along with a few others that may surprise you. Don’t panic, they might not be as much as you think. About 21% of entrepreneurs begin with less than $5,000, while a majority spend less than $50,000. For certain businesses, including hotels and restaurants, you can expect much higher average startup costs.
How much does it cost to start a business?
To help you avoid sticker shock while starting your business, we’ll start with a list of common startup cost examples.
Most small businesses rent commercial space instead of buying property or using a home office, a 2020 Federal Reserve survey found. Costs vary dramatically depending on your city. For instance, in Manhattan, average office rent was $81.30 per square foot in the first half of 2020. That was more than double the average of $29.29 for a full-service Class A property in the Raleigh-Durham area of North Carolina, according to commercial real estate services firm CBRE.
TIP: Want to find average office rents for your city? Look to your local government. Your county might track office market trends and rent information. Use CBRE’s office rent tracker to find costs in major U.S. markets.
Equipment and supplies
Make a list of equipment and supplies you need for your business. Consider whether it makes sense to lease big-ticket items instead of taking out an equipment loan. Even though the lifetime cost in a lease is often higher, it allows you to try out equipment to see if it’s a fit with what you need. Buying government surplus gear is another lower-cost option. You can find sales here:
Your utilities costs vary by industry and what kind of energy-efficient options, like LED bulbs, you use. Plan on about $2.10 per square foot in energy costs, according to Iota Communications, a wireless communication and data analytics software company.
Licenses and permits
Small businesses often need a combination of federal, state or local licenses and permits. Beyond the basic step of registering your business with your city or secretary of state — more on that in a minute — you may need a professional license. If your small business provides certain health care or legal services, for example, you would need to meet licensure requirements set by your state.
Registering your business
Certain business entities are required to register with their state and/or local governments. The total cost to register your business is less than $300 in most cases. Sole proprietors are not required to register at all if they do business under their legal names. Otherwise, it would be necessary to file a “doing business as” or DBA with your local government, usually for a nominal cost, ($33 in Monroe County, N.Y, for example.)
Every business with employees is required to have workers’ compensation, unemployment and disability insurance. If you employ 50 or more full-time workers, you’ll need to offer health insurance as well. Keep in mind that your state may have additional small business insurance requirements.
And even though you might not be legally required to carry these types of insurance, you may want to consider:
- General liability insurance
- Commercial property insurance
- Product liability insurance
There are also insurance policies that apply to specific types of businesses, from
alarm system installers to wholesalers and distributors.
Businesses like a clothing shop or bakery often need to have an initial batch of goods in stock before opening. Consider the size of your store and how much storage space you’ll need. But don’t overdo it: You don’t want to get stuck with excess inventory like out-of-season fashions or spoiled food.
More than 70% of U.S. small businesses employ fewer than 10 employees, and 55% have four or less, according to the Federal Reserve. Average median hourly wage varies by sector. For instance, retail sales workers earn a median hourly wage of $11.84, while dental hygienists earn about $37, according to the U.S. Bureau of Labor Statistics. The BLS also offers business owners a more detailed breakdown by state.
Advertising and marketing
Your company’s marketing budget might depend on your industry or type of marketing that’s best for your business. Businesses of all sizes surveyed by Deloitte and others spent an average 8.6% of overall firm revenue on marketing. Out of total marketing funds, digital marketing outpaced traditional marketing. Digital marketing may include:
- Your own website
- Social media channels
- Digital advertising such as Google, YouTube or Facebook ads
- Email marketing
It costs $7.19 per 1,000 impressions on average to advertise on Facebook and $9.68 per 1,000 impressions on YouTube, according to digital marketing firm WebFx. Squarespace charges between $5 and $68 a month, depending on whether you pay monthly or annually, for email marketing services.
8 surprise startup costs
While paying employees and renting an office space are among common startup costs, there are also unexpected business costs to keep in mind.
A feasibility study may not be required when registering a business or even applying for a business loan, but it could save your company valuable time and capital. It’s different from your business plan, a blueprint for how you will organize your business and a common lender requirement. A feasibility study helps answer the question of should you organize this business, examine the market plus the technical and financial workability of your ideas.
Small Business Development Centers (SBDC)
You can turn to your local SBDC for guidelines on how to conduct the study. It might even provide a low-cost feasibility study for you.
Market research involves studying the size, growth trajectory and trends of the market you want to compete in and learning who your target customers are. You can bootstrap the research yourself using public resources, or hire help.
Freelancers on platforms like Fiverr offer market research services ranging from a few bucks for a basic search to hundreds of dollars. Market research firms may charge as much as $10,000 for a business with $5 million in revenue, according to marketing firm Hinge.
A competitive analysis studies how you stack up against your rivals, what sets you apart and why a customer should choose your offering instead. Besides studying your direct competitors, also look at indirect competition eying the same target customer. Like feasibility and market research, competitor research might not be required for financing, but could save time and money in the long run.
Yes, you might be able to handle your own bookkeeping or meet your tax requirements, but professional services like accounting or legal advice would allow you to solely focus on starting and growing your company.
The median hourly wage for an accountant is $34.40, according to the Bureau of Labor Statistics. Bookkeepers or noncertified accountants may charge less but do not have to meet the same requirements as a certified public accountant (CPA). You could look to professional-service marketplaces like Thumbtack for help in your area or online services like QuickBooks.
Personal living expenses
Your personal living expenses also should be considered, especially when it may take longer-than-expected to turn a profit and pay yourself.
Opening expenses, other contingencies
It’s important to set aside money for unexpected events or spending. When you open a storefront, for example, you’ll likely incur extra spending on special opening promotions and marketing.
You’ve planned for marketing expenses like advertising and a new website, but there may be opportunities you didn’t anticipate. Trade shows can help small businesses owners network and find leads. Technology and service providers on average spent 11% of their marketing budget on third-party trade shows, according to research firm Gartner.
With the trend of big and small businesses migrating their data to the cloud and using cloud computing and data science to glean consumer insights or improve worker productivity, these types of services have increasingly become part of business startup costs.
How to get money to start a business
Personal savings or money from friends and families remains the most common funding source for small businesses. But even if your business is able to keep start-up costs low, your company may need financing at some point to sustain or grow its operations. Small business loans, business credit cards, grants, crowdfunding and venture capital are just a few of your choices.
Small business loans
Small business loans are a common external financing option, but it may be difficult for new companies to qualify, particularly for traditional bank loans. SBA loans are an option, even for new businesses, but credit requirements or the time involved in applying might be barriers. Alternative online lenders offer fast funding with lenient credit requirements, but fees can be high.
Business credit cards
Business credit cards are neck and neck with loans and line of credit as sources of capital for small businesses. They may offer rewards points and relatively easy applications, but typically come with higher interest rates and smaller credit limits, especially when compared with bank loans.
Crowdfunding is expected to grow, not a surprise since it offers business owners a low-risk way to get funding and publicity. But there are a few pitfalls, too. Owners need to make sure their campaigns stand out in a sea of similar posts, which may require a significant amount of time and maybe even some money. Success rates vary by categories. And you’ll need to carefully consider the right crowdfunding platform. When the campaign is over, make sure you’re following the rules for reporting the income.
Even though there are no direct federal grant programs, you may be able to find programs in your city or state. There are also no-cost or low-cost funding options for specific types of owners including:
For small businesses with high-growth potential, venture capital could give you financing in exchange for equity stake in your company. Business owners would not have to take on debt to finance their company, but they must be willing to give up a certain amount of control.