The decision to start or buy a small business is an exciting step. Whether you’re launching your own independent business or investing in a franchise, it’s the beginning of being able to be your own boss and control your future. But buying a business isn’t an easy decision, and the first question you’ll probably ask yourself is, “Just how much does it cost to start a business?”
While start-up costs can vary by the type of business you’re starting and where you’ll be operating it, all businesses have some standard setup costs, such as incorporation fees, business insurance costs, etc. The first step is to evaluate all your needs to determine the total amount of capital, and then pursue financing.
According to Guidant’s State of Small Business survey, 48 percent of small business owners spent $50,000 or less on start-up capital. Another 18 percent spend between $50,000 and $100,000. And according to an Intuit survey, some entrepreneurs were able to curb costs enough that it cost them less than $10,000 to get their business off the ground.
So what will it take to open your doors? Business expenses usually fall into two buckets: one-time costs and recurring or ongoing costs. Below are some of the most common expenses within each category you’ll need to account for as you begin to estimate the cost to start your small business:
One-time Business Costs
Especially during the start-up phase, you’ll run into a number of one-time costs to setup your business, both physically and theoretically. The most common one-time costs include:
- Construction permits and costs. If you plan to have a brick-and-mortar business, whether it’s a retail shop or just office space, you may need to construct a new building or make renovations to an existing one to fit your needs. From scratch, commercial construction costs can run between $160 – $170 per square foot, but it’s largely dependent on location and the type of materials needed. You may also need to apply for a construction permit with your local government.
- Equipment costs. Once you have your business space built according to your specifications, you’ll need office furniture, and any equipment specific to your industry. While you can often find used furniture for sale that can help curb costs, larger equipment can range from a few hundred to a few thousand dollars.
- Entity filing or incorporation fees. Depending on the type of business you start, you may need to pay a fee to register your business with your local Secretary of State. C corporations, limited liability companies (LLCs), and some other types of entities need to register with the state and receive a tax identification number. This process can cost between $100 to $250. Always check the website for of your Secretary of State to learn about state-specific fees.
Recurring Business Costs
Just as you have monthly household bills, you’ll also have a series of ongoing costs to operate your business.
- Rent. If you plan to rent your place of business, you’ll need to factor in these costs into your monthly budget. Depending on your location and the size of your facility, this can range from a few hundred to a few thousand dollars.
- Human Resources. Whether you plan to be your business’s sole employee or you hire a team, you’ll probably need to factor in monthly salary as a recurring cost.
- Professional Services. As a business owner, you’ll wear many hats. However, rather than trying to do it all yourself to keep costs low, it can help a lot to work to your strengths, and hire outside professionals to cover your weaknesses. For example, if you excel at customer service but aren’t great with finances, focus your time on helping customers and hire an accountant to handle your business transactions. This will ensure accuracy in your business books and efficiency across the board.
- Business Insurance Costs. Business insurance might be mandatory in your situation, as some landlords demand it or if you have employees. Depending on the size of your business and the type of business insurance you want, you could be paying around $100 per month or $1,200 per year.
- Taxes. All businesses must pay taxes, though the amount depends on your business entity and your revenue. Outsourcing your tax preparation to a qualified professional can also help you save money and stay in compliance.
How Much Does It Cost to Get a Business License?
Depending on the type of business license you need, costs can range from $50 to several hundred dollars. While not all businesses require licensing, certain industries may be required to get a business license or permit. Examples of business licenses include liquor licenses (required to sell alcohol), healthcare licenses for medical professionals, and agriculture or aviation licenses.
How Much Does It Cost to Franchise a Business?
Every franchise brand will require you to pay an initial franchise fee, which pays for use of the brand name as well as access to their business model and some training. These initial franchise fees can range from ess than $50,000l to millions of dollars for recognizable brands, like McDonald’s.
Buying a franchise can be a great entrance to business ownership for some. Franchising allows you to buy into an already-proven business model with guidelines on how to make your location successful. Franchising is best for those who like to follow rules while still having the ability to be your own boss. Learn more about the differences between franchises and independent start-ups here.
How to Obtain Small Business Financing
Once you’ve determined how much it will cost to start your business, the next step is to figure out how you’ll pay for everything. Since most individuals don’t have such large amounts of cash available, many turn to small business financing options. Most funding options fall into two categories: debt-based financing or equity financing.
Debt-based financing options involve borrowing money that must be repaid, usually with interest.
The Most Common Type of Debt-Based Financing
- SBA Loans
- Business line of credit
- Home equity line of credit (HELOC) or mortgage refinancing
- Unsecured loans
Equity financing involves using funds you (or others) already own and reinvesting them.
Popular Types of Equity Financing
Guidant Financial is a leader in small business financing. Our financing experts are committed to helping aspiring entrepreneurs not only understand the financing options available to them, but also select the right option for them. Check out our business financing calculators to learn more about estimating start-up costs, or take our pre-qualification assessment to determine which methods you qualify for.
There’s a lot of work that goes into starting a successful small business, and it can take anywhere from a few months to a few years, depending on your timeline. All too often businesses fail due to insufficient funds during the start-up phase, but by doing thorough research to estimate costs and adding extra cushion to get you through the first few months, you’ll be well on your way to becoming a profitable small business owner.