Customer small business financing solutions delivered through a single, online application.
Loan Types
Free access to multiple funding solutions
See funding solutions from 75+ nationwide lenders with a single application.
Apply for financing, track your business cashflow, and more with a single lendio account.
Home Business Loans Startup Costs: Guide To Understanding Business Expenses
One of the main reasons small businesses fail is lack of capital. Entrepreneurs are excited about getting their venture started, and sometimes can overlook essential business startup costs in their haste to get going. As a result, they often don’t start with enough capital, which causes them to run out of money before they can get their businesses off the ground. But it doesn’t have to be that way.
Here’s what you need to know about startup costs for a business and how to set yourself up for success.
If you were going to build a house, you wouldn’t try to do it without a blueprint. You’d need to know how to pour the foundation, erect the walls, where to put the bedrooms and the kitchen, and what type of roof to install.
It’s the same with a business.
Starting a new business requires a well-thought-out plan. It provides the details of how you intend to build your business and make a profit. The basic elements of a business plan are as follows:
A business plan provides the answers to these questions, and gives you a guideline about how much money you’re going to spend getting your business started, how and when the cash will come in, and how much profit you intend to make.
Every business needs a certain amount of money to get started—some need more than others. Brick-and-mortar stores take more capital than an online business or a service-based operation. One isn’t better than than the other—they just have different needs for startup capital and have different kinds of startup costs.
Most startup expenses typically fall into the categories listed below:
Market Research Estimated Cost $-$$
Before you start any business, you must do the initial research to identify the types and quantity of potential customers who might want your products and services, and do some digging into the number and strength of your competitors. An owner could save money and do the research themselves or hire a market research firm.
Licenses and Permits
Estimated Cost $-$$
Most businesses, regardless of the type, will need certain licenses and permits, depending on local and state regulations. Fees will vary by location.
Insurance
Depending on the type of business, you’ll need insurance to protect your business assets, cover your employees, and provide coverage for liability lawsuits from customers or other outside parties. A construction company with employees operating heavy equipment will need more insurance coverage than a sole proprietor working out of a home office.
Office or Warehouse Space
Estimated Cost $100 to $1,000/monthly per employee
If you’re renting office and warehouse space, you’ll need money for deposits and leasehold improvements.
Equipment and Supplies
Estimated Cost $$-$$$$
Almost every business needs some type of equipment. A construction company may need heavy earth-moving equipment, and a restaurant will need ovens, furniture, and dishware. And every business will likely have technology and electronic needs, like computers with software and networking capability for employees.
Technology
—- Every business needs an online presence, whether it be an online marketplace selling goods (like clothing retailers, bake shops, or beauty suppliers) or a professional services firm highlighting its offering (think lawyers, accountants, dental offices). Costs for a website can range from just a few hundred dollars to several thousand.
Utilities
—- If you have a physical location, you’ll have to pay for utilities, such as electricity and gas. On the other hand, if you’re starting your business from home, utility costs will likely be much less.
Advertising and promotion
Estimated Costs $-$$
—- Somehow, you have to get the word out that you have products and services to offer to customers. Your business plan should detail how you intend to promote your business and the costs involved. You’ll probably have to do more than put a few ads in the local newspaper.
Inventory
Estimated Cost $-$$$$
—- Businesses that are selling physical products will likely need to maintain an inventory. Depending on the business, an investment in inventory can range from a few thousand dollars up to several hundred thousand dollars.
Employees
—- Employee wages, benefits, and health insurance can be a significant part of your startup costs. In the early stages of a business startup, owners can lessen the costs of employees and benefits by hiring them as needed and paying them as 1099 independent contractors.
Organization
—- If you’re setting up your business as a corporation or a partnership, you may need to hire a lawyer, which can cost several thousand dollars, to prepare the legal documents, such as the articles of incorporation, bylaws, or a partnership agreement. The least expensive organization structure is a sole proprietorship since you’ll likely only need to file a business name with the local court clerk.
Working capital
—- You’ll need enough working capital to operate until more cash is coming in than going out. A good rule of thumb is to be able to cover at least 6 months of expenses, but each business has its own unique cash flow pattern. The financial projections in your business plan will give you some insight about the timing of your cash flow and how much capital you’ll need to fund the deficits.
If you’re selling on credit terms to your customers, there will be a gap between the time you pay your suppliers and employees and when you receive payments from your customers. You’ll need enough working capital to cover this cash flow deficit in the meantime.
Tax deductions
—- The good news is that some of your business startup expenses will be deductible on your tax return. You can consult IRS publication 535 – Business Expenses to learn which ones are deductible.
After you’ve gone through this checklist of business startup expenses, you can begin to determine the amount of funds you’re going to need. The total should include the initial purchase of equipment, leasehold improvements, inventory, supplies, and enough funds to cover cash flow deficits until the business begins to produce a profit.
The first source of funds will be the savings you have put aside to start your business. Self-funding is always the best source since you retain complete ownership over your business.
If you don’t have enough savings to cover your startup costs, the next sources would be to either to apply for additional financing or solicit outside investors. If you have an excellent credit history, banks would be desirable alternatives, but you have to go through a rigorous credit approval process. Another source of startup business loans are online lenders, such as Lendio.
You can contact Lendio to learn the various types of financing options they have available to fund startup businesses.
Small Business Administration − “Calculate Your Startup Costs”
SCORE − “Startup Expenses”
Small Business Administration − “Fund Your Business”
Internal Revenue Service − “Publication 535 – Business Expenses”
Disclaimer: The information provided in this blog post does not, and is not intended to, constitute business, legal, tax, or accounting advice. All information, content, and materials available in this post are for general informational purposes only. For advice specific to their situation, readers should contact their attorney, business advisor, or tax advisor to obtain advice with respect to any particular matter
James Woodruff has been a management consultant to more than 1,000 small businesses over the past 30 years. This background has given him a foundation of real-life experiences for his freelance writings on business topics. James has written extensively for PocketSense, Sapling, Bizfluent, SmallBusiness.Chron.com, and Work.Chron.com. He previously had his own firm that specialized in financing exports from the United States to clients in Central and South America. James received a Bachelor of Mechanical Engineering from the Georgia Institute of Technology and an MBA in finance from the Columbia University Graduate School of Business.
Subscribe to our weekly newsletter for industry news and business strategies and tips
Subscribe to our weekly newsletter for industry news and business strategies and tips.