How to prepare for your small business startup costs

Key takeaways

• Most small businesses fail because of cash flow problems 
• It’s essential to budget for small business startup costs before forming your company
• You can calculate expected costs with the Small Business Administration worksheet

A bike shop owner who wants to meet her community’s needs. A hair stylist sharing her craft with a community she cares about. Small business owners often go into business to make an impact, not profit. But in the crucial first year, every business plan requires cash to get it off the ground—and budgeting for these expenses is one of the biggest pitfalls for new entrepreneurs. According to data from the Bureau of Labor Statistics, about 20% of small businesses fail in the first year, and cash flow mismanagement is one of the most common reasons.

However, planning for small business startup costs will set you up to succeed. Although costs vary based on industry, this guide will help new business owners estimate how much capital they need to make their entrepreneurial dreams come true. 

Legally establishing your business 

Before you provide any products or services, you may need to pay filing fees to register your company with state or federal agencies. 

The cost of registering varies based on your location and type of business entity. Typically, small business owners register as one of the following: 

• Sole proprietorship: This option designates one person as the owner. Registering costs between $10 and $100.
• Limited liability company (LLC): An LLC limits the liability for a company and protects your personal assets. Registering costs around $130 if you file on your own; using a lawyer ranges from $1,000 to $1,500.
• Corporation: This structure separates the owner from the business entity and is complicated to set up. Online incorporation services typically cost between $100 and $900.

Also, some states require annual fees to renew your registration, so you should prepare to pay each year to stay in operation. 

Next, consider other legal expenses, including business licenses, permits, and business insurance, which vary depending on your line of work. For instance, opening a restaurant and serving alcohol requires specialized—and sometimes costly—permits.

To learn more about the specific permits or licenses you need, visit the Secretary of State website for your state or other small business resources, such as the Small Business Association (SBA). Researching first will help you discover and prepare for early startup costs and navigate cash flow pitfalls.

Housing your business 

Once your business has a structure, it’s time to make it a reality. Start by evaluating your workspace needs: Can you work from a home or do you need an office? Will you need a brick and mortar shop or is your business online or delivery-only?

If you’re selling products to consumers in person, you’ll likely need a physical location, which comes with real estate expenses like rent or a mortgage. If you serve other businesses or you provide in-the-field services—such as dog walking or plumbing—your priority might be office space to conduct business operations or storage space to house equipment. 

Many B2B professionals or service businesses cut costs by working out of a home office, which allows you to use portions of your mortgage and utilities bills as a business tax deduction, according to the IRS. However, as your business needs grow and you hire employees, you may also need a larger office space. Depending on your needs, these options may work for you:

• Co-working space: A co-working space is shared office space with different areas available for rent. Co-working spaces typically offer perks like free coffee, Wi-Fi, tables and chairs, printer access, and more. These can help you cut down on your total expenses, and all rental costs are tax-deductible. 
• Sublease: For a more private solution, consider subleasing—renting a portion of a building from the company currently leasing the space. 
• Renting: If you need more space for employees and clients, consider renting. Although this is the most expensive option, you can still deduct rent expenditures when filing your tax return because you do not own your office space. 

Talk to a commercial real estate agent to find office properties available in your area or browse a site like LoopNet for commercial listings. Remember that depending on the type of space you choose, you may also need to furnish it. Consider using lightly used furniture—especially for office environments—to help cut costs.

Hiring employees

One of your most important investments as a new business is your team. Typically, labor costs average about 20% to 35% of your total sales. And while employees will eventually help generate more leads and increased revenue, you’ll have to budget for the start-up costs of both their wages and training.

When hiring employees for your new business, there are several options to consider:

• Freelancers: Freelancers are contractors who are hired on a per-assignment basis, which means there’s no long-term obligation. Freelance marketplaces like Upwork and Fiverr feature freelance experts who can provide you with the short-term services you need to get started, such as branding design or email marketing 
• Part-time or full-time employees: As the backbone of your business, employees earn wages either in the form of hourly pay or an annual salary. You’ll likely foster deeper relationships with employees and train and retain them better than freelancers, but you do have to pay higher taxes on their wages.
• Partners: If you collaborate with someone who is particularly skilled or knowledgeable—for example, a business or marketing manager —a partnership might make more sense than hiring them as an employee. Partners are co-owners who have equity in the company and typically share both profits and losses with you. 

Of course, labor costs are about more than the hourly wage you pay. Hiring new employees costs more than retaining existing ones, so it’s in a business owner’s best interest to attract and retain employees through proper training and high-quality work environments and benefits.

Choosing the right technology 

While the broader range depends on your industry, you should be prepared to spend about $1,000 per year on average for software and licenses. For retailers, restaurants, and other online sellers, a crucial first purchase is a point-of-sale system to process transactions—both in person and online. Request demos from multiple companies and compare your options to make sure you select the system that fits best with your business.

Next, budget for software programs that manage daily business operations. For instance, many business owners use bookkeeping and accounting software to budget and track expenses. 

Microsoft Office has a software suite tailored to small businesses, including Word for creating documents, Outlook for emailing employees and customers, and more. Though Microsoft is a household name for business management, there are also other more affordable alternatives available. 

Marketing your business

Creating a strong and authentic brand and fostering an environment of word of mouth marketing can help you save in the long run. Studies have found that even though customer acquisition is the biggest problem for startups, half of startups spend less than two hours per week on marketing.

The look and feel of your branding help customers connect with your company on an emotional level—and can inspire them to return again and again to your business. If you don’t have graphic design expertise, you may want to hire a designer to create or refine your brand identity, which includes your brand colors, typography, and logo—recognizable on everything from T-shirts to retail signage. Most entry-level designers can provide custom logo designs for as little as $100–$300 on contractor sites like Upwork.

Another important marketing expense is building your business website, which adds credibility to your brand and helps customers learn more about your products, services, and values. Purchasing a domain name can cost as little as $10 per year on sites like GoDaddy. 

With your brand winning over hearts and minds, the next step is using marketing channels to turn interest into revenue. According to the SBA, the amount you budget for marketing is less important than how you spend it. The way you market has to make sense for your business and your target audience, whether it’s writing blog posts for your website, sending email campaigns, or paying for ad campaigns to drive customers to your website.

There are also a variety of free and low-cost tools to help grow your business, including having a Yelp Business Page. Claiming your business listing is free and allows you to add your business details and contact information, upload photos, and respond to customer reviews and questions. 

Financing small business startup costs

Before starting your business, it’s common financial advice to have enough capital for at least six months’ worth of expenses—for both one-time fees and recurring costs. The SBA’s small business worksheet can help you estimate the costs associated with opening your business. 

Most business owners don’t have enough cash on hand to cover those costs, so start thinking about how you can raise the money, such as:

• Bank and SBA loans and grants
• Friends and family 
• Private lenders
• Crowdsourcing
• Financing plans for equipment or software

Successful budgeting for small business startup costs

Small business startup costs can vary dramatically depending on your industry and location—from a couple hundred dollars to tens of thousands. However, researching your startup costs will make it easier to estimate even the largest expenses.

Once you’ve determined your startup costs and are ready to hit the ground running, you can create affordable online advertising campaigns.