Starting a business – whether it's a lean, online setup or a full-scale operation – can be exciting but expensive. The cost to launch a business varies depending on the industry, location, and other factors. Before starting a business, entrepreneurs should estimate their expenses carefully. This is especially important because a majority of small businesses in the US are likely to fail within the first three years, sometimes due to problems with startup costs. Thinking through these costs can help a potential business owner make informed choices, avoid surprises, and create a clear strategy for their venture.

Below, we'll cover how to calculate startup costs, which business types typically have lower startup expenses, what hidden costs may exist and how to fund your business with minimal capital.

What's in this article?

• How to calculate startup costs
  
• What types of businesses have the lowest startup costs?
  
• What are the hidden costs of starting a business?
  
• Online vs. physical costs: How your setup impacts your budget
  
• How to fund a business with minimal capital
  
• How Stripe Atlas can help
  

How to calculate startup costs

Calculating startup costs begins with identifying the things you absolutely need to start your business. From there, you can divide expenses into one-time costs, such as incorporation fees and initial equipment purchases, and ongoing expenses, such as rent and software subscriptions. Estimating each type of expense can help you understand what your startup needs to begin operations.

Here are different types of expenses to consider:

• Fixed costs: These are unchanging, regular expenses that a business must pay. For online businesses, they might include website hosting fees and cybersecurity tools. For physical businesses, they might include rent and utilities.

• Variable costs: These include marketing, packaging, inventory, and production costs, which fluctuate based on demand, seasonality, and other factors. For example, product-based businesses often need different levels of inventory at different times. Conversely, service-based models might need varying levels of freelance support during particular periods.

• One-time costs: These are the "launch day" expenses you might not pay again, such as legal fees for incorporation, permits, initial marketing campaigns, and, if applicable, renovations of a physical location. In the US, each state has a basic filing fee for the articles of organisation or articles of incorporation, ranging from $35 to $300.

Depending on your business model and location, the total cost of starting a business can range from a few hundred dollars to thousands of dollars.

What types of businesses have the lowest startup costs?

For aspiring entrepreneurs, certain types of businesses can be more budget-friendly, especially those that don't rely on a physical storefront, inventory, or extensive equipment.

If keeping costs low is a priority, these business types can allow you to enter the market without extensive capital:

• Service-based businesses: Service-based businesses, such as freelance design, writing, consulting, and virtual assistance, usually need only a computer, software, and a solid internet connection to begin. You can also reduce marketing costs if you begin with word of mouth and networking.

• Online retail with drop-shipping or print-on-demand: E-commerce businesses traditionally require an up-front investment in inventory, but models such as drop-shipping and print-on-demand enable you to sidestep these costs. With drop-shipping, the supplier ships products directly to your customer. Print-on-demand lets you create custom merchandise without holding stock.

• Digital products and courses: From e-books and digital art to online courses, digital products are increasingly popular and flexible, with low up-front costs. Once you create the product, you can sell it repeatedly online without additional inventory.

• Consulting and coaching: Career coaching, business consulting, fitness coaching, and similar industries don't require heavy investments in infrastructure. Aside from certifications or tools, such as client management software, startup costs are typically low.

What are the hidden costs of starting a business?

Be prepared for hidden costs so you can avoid surprises that disrupt your budget. This can help you effectively manage your business's cash flow.

Here are some costs founders don't always expect:

• Permits and licensing fees: Certain industries charge fees for permits and business licenses before operations begin and over time in the form of renewal fees. Check your area's requirements early to evaluate ongoing costs. Business licenses typically range from $50 to a few hundred dollars.

• Professional fees: You might need to hire lawyers, accountants, or other experts to establish contracts, file taxes, or implement other aspects of your business. These professionals charge hourly, and you should account for their fees up front.

• Software and tool subscriptions: Many software tools, such as customer relationship management (CRM) systems, social media schedulers and website analytics, operate on a subscription basis. You should budget for the total cost of all subscriptions on a monthly and annual basis.

• Insurance premiums: Liability, property and employee insurance can all come with higher premiums than expected, depending on your business’s risk level. For example, e-commerce businesses and physical storefronts might require general liability insurance, while service providers usually choose professional liability insurance.

• Personnel expenses: Employee costs can include salaries or hourly wages, benefits, payroll taxes and worker's compensation. If you're working with freelancers or contractors, you should account for costs such as onboarding time, productivity tools, and project management software. A general rule of thumb is that payroll should account for 15%–30% of gross revenue, but that number will be higher in labour-intensive industries.

• Marketing and advertising costs: Initial marketing campaigns or ads can be more expensive than anticipated, especially if the business is testing different methods to see what works. Organic reach takes time, so if your business needs quick visibility, budget for extra marketing. The average marketing budget generally hovers around 10% of total revenue.

Online vs. physical business costs: How your setup impacts your budget

The biggest location decision you can make is whether to have an online or a physical business. This affects nearly every expense category, from startup costs to day-to-day operations.

Here's how your location choice impacts your budget:

• Real estate and rent: Physical locations (e.g. retail shops, offices, warehouses) have substantial rental or lease costs and frequently require multiyear commitments and security deposits. Urban areas typically charge more per square foot. Online businesses eliminate rent expenses and come with much lower overhead costs, because they only need a website and hosting.

• Utilities and maintenance: A physical space comes with material costs, such as electricity, water, heating, internet, maintenance, and repairs. Online businesses avoid most of these costs but include other expenses, such as website hosting, digital tools, and data storage.

• Permits, licensing, and insurance: Depending on the area and business type, physical locations might require special permits and licences that don't apply to online setups. Liability insurance is also usually more expensive for physical stores. Online businesses typically need lower-cost digital security or general liability insurance.

• Staffing needs: Physical locations often require in-person staff to handle operations, customer service, and security. Hiring for these roles means paying for salaries, training, and benefits. Online businesses usually have fewer staffing needs and lower payroll expenses, as they can operate with fewer personnel or remote freelancers.

• Marketing and reach: Physical locations rely on local foot traffic and might require more investment in local advertising, signage, or storefront design to attract customers. Online businesses can reach a broader audience through digital marketing and can often start with a modest advertising budget.

How to fund a business with minimal capital

Between 90% and 95% of new businesses with employees in the US need some capital to start their business. Starting a business without ready cash is challenging and might require gathering resources from several places.

Here are a few creative ways to start your business with minimal capital:

• Bootstrapping: Many founders start with self-funding, also known as bootstrapping. They use personal savings or part of their income to cover initial costs. This might mean working a job while building the business on the side, which makes this method slower, but it keeps you in control and free of debt.

• Crowdfunding: Platforms such as Kickstarter and Indiegogo allow you to raise funds from potential customers and supporters. By pitching your business idea in a compelling way – often with a reward system that doesn't involve equity – you can gather small contributions from a large audience.

• Grants and competitions: Some organisations and government agencies offer grants for startups, especially startups in tech, sustainability, and education. Business pitch competitions also award money to promising ideas, with no repayment required.

• Presales or service deposits: For product-based businesses, consider pre-selling items or offering pre-orders to secure funds before production. Service-based businesses can take deposits up front, which can then be reinvested back into the business.

• Business credit: If your credit score is strong, business credit cards, credit lines, or business loans can provide extra capital. Be mindful of interest rates, and use these resources only if you have a reliable plan to generate income and pay back what you borrow.

• Bartering: It's sometimes possible to trade your skills or products with other businesses and conserve cash by exchanging value. For example, a graphic designer could trade logo design services for a few months of website hosting.

17. Consider business loans

Using business loans as a part of your financial strategy can be a powerful step to expedite your business growth. Here's how to approach this step:

• Determine your need for a loan: Before jumping into the loan application process, assess whether you have a genuine need for a loan. Maybe you need funds for expanding your operations, buying equipment, increasing inventory, hiring staff or smoothing out cash flow. Getting clear about your business's financial needs can help you make a more informed decision about applying for a loan.

• Research different types of loans: There are different types of loans available for businesses, from traditional bank loans and Small Business Administration (SBA) loans to alternative online loans and lines of credit. Each type comes with its own terms, interest rates and requirements. The right choice for you will depend on your specific needs, financial situation and the stage of your business.

• Consider eligibility requirements: Lenders have varying criteria for approving loans. These can include factors such as your credit score, business revenue, the profitability of your business and how long you've been in operation. Before applying for a loan, carefully check these criteria to see if you qualify.

• Prepare your loan application: Once you've chosen a type of loan and confirmed that you meet the lender's criteria, the next step is to prepare your loan application. This involves compiling financial documents such as your business plan, financial statements, tax returns and details of your collateral. You may also need to present a plan outlining how you intend to use the loan and how you will repay it.

• Compare loan offers: If your loan application is approved, you may receive offers from different lenders. Consider each offer's terms carefully, including the interest rate, loan amount, loan term and any additional fees. Be sure you understand the total cost of the loan and how the repayment terms align with your business's financial projections.

Taking on debt is a serious commitment that demands careful planning and consideration. For additional guidance throughout the process, consult with a financial advisor or mentor.

There's no easy shortcut to starting a business. Cutting corners or skipping steps in the early days can create unnecessary friction, confusion or even legal liability down the road. But while much of the work that goes into starting a new business might seem tedious, it's not overly complicated. If you take a thoughtful and methodical approach to this process, and address each step in the correct order, you'll build a foundation that can support all the goals and dreams you have for your business – exactly what motivated you to begin this journey in the first place.