Realistically, How Much Does It Cost to Start a Business?

While the image of startups portrayed in the media usually depicts a Shark Tank-esque frenzy of multiple rounds of fundraising and meeting with venture capitalists, in actuality, the majority of small business owners start their business with passion and a small amount of savings.

You can achieve your dream of starting a business with a checklist, some chutzpah and a shoestring budget. That being said, the more savings you start off with, the more likely your business is to survive and thrive. So how much do you actually need in the bank to turn your business dreams into reality? Let's find out.

How Much Does It Cost to Start a Business?

According to the SBA or Small Business Administration, most microbusinesses (with one to three employees) cost approximately $3,000 to start. Additionally, they estimate home-based businesses to cost between $2,000 and $5,000 to start.

How much it will cost to start your business will depend upon what type of business you’re starting. Your business costs depend on your business needs. If you’re starting an online or at-home business, your costs will be a lot lower than if you’re starting a retail business where you need a physical space to sell items. A good foundational rule to base your savings on is to have enough savings to cover your fixed costs for six months. Fixed costs include things like rent, monthly software charges and employee salaries. 

While your expenses will grow as your business does, knowing a rough estimate for your fixed costs per month can be a great place to start. And, while having six months of business expenses in your savings account is an ideal way to start your business, it’s not a requirement. You can start your business with just a month or two of savings and then pay off expenses as money comes in from customers.

The two biggest factors in how much it will cost to start your business are the type of business you’re starting and the number of employees you have. The more employees you have, the higher your costs. The more amenities, tools or products you’ll need for your business, the more expensive it will be. For example, as mentioned above, a brick-and-mortar store will be much more expensive to start than an online business. 

To help you figure out exactly how much your startup costs will be for your business, the SBA has created a business startup cost calculator.

How Much Money Should You Have Saved Before Starting a Business?

Most small business owners will start their small business not with outside, formal funding but with their own savings. As stated previously, best practice is that you have six months of either business expenses or your personal living expenses in savings (or, ideally, both).

By having six months of living expenses in savings, you’re giving your business six months of time where you don’t have to make a profit or pay yourself. During those six months, you can use any income to reinvest in your business, pay other employees or purchase tools and software that your business needs. While you live off of your savings, your entrepreneurial earnings go right back into growing your business. 

To build up your personal or business savings and fund your business, you can cut back on your personal expenses, ask for a loan from friends and family or look for more traditional funding such as a business term loan from a bank. Your personal savings can be used as an initial investment into your business. 

A Shopify survey found that the most common sources of funding for small business owners were:

• Personal savings — 66 percent
• Reinvesting revenue from sales — 30 percent
• Money from friends and family  — 23 percent
• Personal loan — 21 percent

While it’s helpful to have some business or personal savings, it’s possible to start your business with very little to no money. 

Are People Still Starting Businesses in 2022?

While the past few years have seen a lot of turmoil, it hasn’t stopped people from starting businesses. Actually, it’s been the reverse. From March 2020 to June 2021, there was a record number of businesses started, with over 440,000 formed in June 2021 alone. Times have been tough on all businesses the last few years and many companies have laid-off employees. It’s common that when times get tough, people get creative. That means starting their own businesses.

According to data from the Census Bureau, over 4.4 million new businesses were created in 2020.

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To truly understand those historic numbers, it’s important to know that it’s a 24.3 percent increase over 2019. And, it’s 51 percent higher than the average number of businesses started between 2010 and 2018. This trend has continued into 2021 and is looking to continue into 2022.

Costs Associated with Starting a Small Business

When it comes to starting a small business, there are a number of costs to consider. And, when you’re calculating the monthly costs for your business, it’s important to consider which are necessary up-front costs and which you can hold off on until you start turning a profit.

Your business costs will fall into a number of different categories, such as operating costs, website and software, marketing and products. Each of these cost categories can be defined as one-time costs, ongoing costs, essential, optional, fixed or variable. Understanding the different costs you can expect can make it easier to calculate how much you’ll spend each month on your business. 

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One Time Costs

One-time expenses are just what they sound like: an expense that you’ll only purchase once. While you might experience a number of one-time costs during your time as a business owner, you’ll see a majority of them at the beginning.

One-time costs could include things such as equipment (computer, desk, desk chair), machinery, incorporation fees and many others. These one-time costs can disrupt your cash flow as they will make your expenses higher than expected for one month. 

Incorporation Fees

The fees you pay to incorporate your business are a great example of a one-time expense. Your incorporation or filing fee is the payment you make to your state to form your business as an LLC or corporation. The filing fee will range from $50 to more than $700, depending on the state in which you’re filing your paperwork. Which business entity you choose for your business will have tax, legal and financial implications for your business. 

Ongoing Costs

In contrast to one-time expenses, as a business owner, you’ll also have ongoing costs. An ongoing cost is an expense that will happen regularly, which can be monthly or annually. These costs can be the same each month or fluctuate, like utilities. 

Payroll

A common ongoing cost that you’ll experience as a business owner is payroll. As a small business owner, you’ll want to pay yourself and any other employees a regular salary. 

To calculate payroll, you’ll need to consider:

• Net pay
• Bonuses
• Commissions
• Overtime
• PTO
• Taxes
• Benefits

There are a number of costs associated with payroll. To estimate how much each employee will cost, consider their net pay and then multiply it by 1.25 or 1.4 to estimate their total cost to your business.

Essential and Optional Costs

A very important thing to understand as a small business owner is which costs are essential and which are optional. When it comes to starting a business, there are a lot of things that would be nice to have but won’t actually make a difference in the success of your business. For example, you probably don’t need business cards. But, you won’t be able to get away without paying your taxes. Essential costs are ones that you can’t skip paying, such as payroll or taxes.

Taxes

When you’re first starting a business and thinking about your budget, it can be difficult to estimate how much you’ll pay in taxes. Your taxes will depend on a number of factors, including deductions, revenue, and your business entity. A very rough but good starting place for estimating your taxes is to expect to pay 20 percent to 30 percent of any income you earn. Keeping a quarter of your earnings in savings will help you not be surprised by a big tax bill at the end of the year.

Fixed vs. Variable Costs

Another important differentiation to make in your business costs is between fixed and variable costs. Fixed expenses are those that are the same every month or year. No matter what, you’ll pay the same price. A good example of a fixed cost would be a software subscription or the cost of a P.O. box. Fixed expenses are simple to calculate for because you’ll know they cost the same each month.

Variable expenses get a little trickier. Your variable expenses will include things such as utilities, materials and shipping costs. These costs will change each month, making it difficult to estimate. 

Unexpected Costs

One of the most difficult costs that a small business owner can run into is the unexpected cost. It’s the expense that sneaks up on you and you hadn’t already saved the money for. Often, unexpected costs include:

• Legal fees
• Inventory and product stocking
• Accounting services
• Taxes

When starting a business, knowing whether or not you have enough money can be stress-inducing. Using the tips in this article, you can better estimate what you think it will cost you to start your business. Be sure to watch out for and plan for some unexpected costs in addition to all of the one-time and ongoing expenses you expect.

And, if you're ready to get started, check out our free Start a Business Checklist, which provides a detailed list of everything you need to do to form a business.