Average cost of starting a small business
Launching a small business almost always involves an initial investment. How much startup funding you need depends on many factors, such as your industry, the products or services or the store location. The cheapest businesses to start may cost as little as $12,000 initially, but other businesses like restaurants can run from $400,000 or more.
The best way to determine your startup costs is to list all expected expenses and the dollar amount for each item. Let’s drill down into the exact dollar amounts to start your business and the types of costs you may encounter.
Key small business cost statistics
- On average, small business owners spend $40,000 in their first full year. (Shopify)
- The least expensive cost is the incorporation fee, which is around $145, while the most expensive can be equipment, typically $11,000 to $125,000. (Forbes Advisor)
- 76% of startups without employees used personal funds to finance their business (Fed Small Business)
- The top financial challenges for nonemployer startups are inflation as well as meeting operating expenses. (Fed Small Business)
- Average hourly pay for an administrative assistant is $22. (Salary)
- Average cost to build a website is $200 and costs $50 monthly for maintenance. (WebsiteBuilderExpert)
- Average cost of adding a new employee to your payroll usually ranges from $4,000 to $20,000. These costs don’t factor in the employee’s salary and benefits. (Indeed)
How much does it cost to start a small business?
Industry averages can help give you a general idea of how much you can expect to spend when starting a small business. As your business grows, you’ll need to be strategic about keeping costs low and opting for the most affordable materials.
By keeping costs low, you’ll see the biggest returns on your investment from business products and services. Your actual costs will vary depending on:
- Size of your business
- Physical or online location
- Number of employees
- Cost of inventory needed
- Cost to produce goods, such a labor and raw materials
Online business vs. brick-and-mortar stores
Whether you have a physical location or an online-only presence will play a significant role in your business overhead costs. For example, an online store could cost you around $2,000 to $20,000 to build, based on Shopify data. That range estimates the cost of hosting and designing a custom e-commerce site. The exact cost may be different if you have a leaner or more robust business model.
Your location can also influence small business costs. The 2021 Business Cost Index by Approve found Texas, Oklahoma, and Kentucky are the three cheapest states to run a business. California, New Jersey, and Vermont are the most expensive.
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 $41.03 to $43.26 per hour.
Given that there are 2,080 working hours in a year, the average employee may cost you roughly $85,000 to $90,000 per year, based on the Bureau of Labor Statistics wage. So if you have five employees, you’ll have to project for $425,000 to $450,000 in costs.
Another way to calculate total employee costs is to budget for their salary, employee benefits and taxes. The Small Business Administration 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 you between $62,500 and $70,000.
Average cost by industry
Your average startup costs will vary greatly depending on the field or industry you’re hoping to tap into. Your industry will determine your entire business model, your inventory needs, your marketing strategy and your costs to produce your goods or services. Here’s a closer look at a few industry averages:
| Industry | Averages |
|---|---|
| Food and restaurants | $375,000 |
| Construction | $37,390 |
| Retail | $39,210 |
| Arts | $32,960 |
| Entertainment | $12,272 |
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.
Key terms
- Essential costs
- Expenses that are necessary to run your business
- Optional costs
- Discretionary expenses that aren’t necessary to run your business
- Fixed costs
- Expenses in which the payment stays the same every billing cycle
- Variable costs
- Expenses that can increase or decrease based on factors like your output and revenue
Essential costs vs. optional costs
Although there are some expenses you can do without or delay, others are unavoidable right from the start. In general, they include expenses such as:
Common essential costs
- Inventory
- Rent
- Website
- Payroll
- Marketing
- Technology
Common optional costs
- New, rather than used or leased, equipment
- Extra office space
- Luxurious business trips and entertaining
- Social media influencers
- A CPA when you can use accounting software instead
- Excess inventory
Fixed costs vs. variable costs
You will find that some of your expenses won’t change from month to month. Others will vary, coming up once or occasionally throughout the year. To ensure that you have enough funds to cover all of your necessary fixed and variable costs, plan ahead.
Common fixed costs
- Rent
- Insurance premiums
- Property tax
- Essential workers salaries
- Internet and cell phone bills
- Loan payments
Common variable costs
- Packaging and shipping
- Raw materials
- Commissions
- Credit card payments and interest
- Travel
- Consultants
Average small business costs
Whether you’re starting from scratch or expanding your business, you want to get detailed about the business costs and 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
| Fixed cost | Average amount |
|---|---|
| Rent | $2,500/month |
| Taxes | 13.3% to 26.9% tax rate |
| Salaries | $41.03/hour to $43.26/hour |
| Insurance | $500/year to $684/year |
| Business loan payments | Example: $110,000 loan with 5-year term at 4.50% APR Monthly payment: $2,050.73 |
| Marketing | 18% to 26% of revenue |
| Incorporation fees | $100 to $250 |
| Website | $200 to build, $50/month to maintain |
When adding up business costs, don’t forget depreciation, which is the value that your physical business assets lose over time due to age or use. You want to include this cost because it affects your business’s overall net worth when comparing its assets versus liabilities.
Average variable costs
| Type of variable cost | Average amount |
|---|---|
| Packaging supplies | $0.10 to $15.00 per product sold |
| Credit card fees | 1.5% to 3.5% per transaction |
| Raw materials | Varies by product and industry |
| Unfixed utilities | $2.10 per square foot |
| Inventory | Varies by industry |
| Shipping costs | Depends on shipping method and box sizeExample: Flat-rate shipping at UPS costs $10.20 to $26.05 |
| Sales commissions | 20% to 30% of gross margin |
| Office supplies | $45 to $92/month |
| Travel | $309.62 per day traveled |
How to save on costs and fund your startup
Businesses can save on startup costs by paring back business expenses to free up extra revenue, or they may opt for a business loan.
Consider trimming your overhead to make your start-up 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. Yet 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 Small Business Administration (SBA) loans or business loans that come 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. A business credit card also gives you the benefit of no interest charges if you pay in full regularly. You will get charged interest if you make the minimum payment or go past the payment due date.
Frequently asked questions
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The first step in starting any business is to figure out how much it will cost you to run it. You’ll need to calculate what your profits might be and how that will grow over time. Start by conducting a break-even analysis to determine when your business will become profitable. Secure any funding you may need, then calculate the loan costs and interest. Attract investors who may be able to provide you with large sums of capital upfront, and determine what the tax implications of starting your business will be. The SBA can help you crunch the numbers and get an estimate.
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You’ll need a business plan and a way to raise capital. Once you’ve made your mind up about what your business will be, you’ll need a plan for how you’ll raise the money to fund your start-up costs, and then a plan for how you’ll invest 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.
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When going solo, it’s important that you understand the tax burden that comes with owning your own business, so you don’t have any major financial surprises later on. Consider hiring a tax professional who can ensure you’re aware of all the taxes and fees you’re responsible for.
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The first step to starting a small business is to understand and refine your business concept. In essence it should be something you enjoy doing as well as that you believe you can make a profit from. After that you will conduct research so you know the market and your competitors, then create a business plan. You will choose your business structure, which can be a sole proprietorship, LLC, or a corporation. Registering your business and obtaining the necessary licenses comes next. Then comes the financials. You’ll need to open a business bank account, take out credit products and business tools, such as a credit card processor to accept payments. Get business insurance, staff up (if you need employees) and start marketing!
