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 more. Therefore, every business owner should estimate expected expenses before they begin.

A majority of small businesses in the US are likely to fail within the first three years, which shows the need to understand startup costs. This understanding can help a potential business owner make informed choices, avoid surprises, and create a clear strategy to make their venture profitable.

Below, we 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?
  
• How location affects startup costs
  
• How to fund a business with minimal capital
  

How to calculate startup costs

Calculating startup costs begins with separating what you need from what you want. From there, you can divide expenses into one-time costs (e.g., incorporation fees, initial equipment purchases) and ongoing expenses (e.g., rent, software subscriptions). Estimating each type of expense can show what your startup needs to begin operations.

Here are some different types of expenses:

• Fixed costs: These are a business’s unchanging, regular expenses. 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.

• 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.

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 your main 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: Ecommerce 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 without additional inventory.

• Consulting and coaching: Career coaching, business consulting, fitness coaching, and similar industries don’t require heavy investments in infrastructure. Besides 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 licenses before operations begin and over time in the form of renewal fees. Check your area’s requirements early to evaluate ongoing costs.

• Professional fees: Lawyers, accountants, and other experts might be required 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, ecommerce businesses and physical storefronts might require general liability insurance, while service providers usually opt for 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.

• 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.

How location affects startup costs

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

Here’s how that location choice determines what you’ll need to budget for:

• 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, as 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 licenses that don’t apply to online setups. Liability insurance is also usually more expensive for brick-and-mortar 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

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 it a slower approach. 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 organizations and government agencies have 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 preselling items or offering preorders 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 or credit lines can provide quick 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.