Startup costs are the initial investments and expenditures a new business must make before it can begin operating. Startup costs can include expenses such as legal fees, office space rental, initial inventory, marketing, and employee salaries. These costs have a major impact on a startup’s early financial health. Financial stability is especially important in a business’s early stages, when income might be low or inconsistent: a 2023 survey found that 38% of startups fail because they run out of money.

Keeping these costs manageable can allow startups to cover key operations such as payroll and supplier payments, help manage financial stress, and affect how attractive the startup will be to investors. Investors are typically drawn to startups that demonstrate prudent financial management because it increases the likelihood of a return on their investment.

Below, we’ll explain common business startup costs, how to determine yours, how to save on them, and how to use your startup cost calculations to get funding.

What’s in this article?

• Common business startup costs
  
• How to determine your startup costs
  
• How to save on startup costs
  
• How to use your startup cost calculations to get funding
  

Common business startup costs

Startup costs are impacted by business type, industry, location, and scale, so each startup’s costs will be different. Here’s a rundown of the types of startup costs that businesses face.

One-time costs

• Business formation and registration: Fees associated with choosing a business structure (e.g., sole proprietorship, LLC, corporation), filing paperwork, and obtaining necessary licences and permits.

• Professional services: Fees for lawyers, accountants, or business advisors.

• Branding and marketing materials: Logo design, website development, business cards, brochures, and any initial marketing efforts.

• Equipment and supplies: Computers, office furniture, machinery, tools, inventory, or raw materials.

• Technology: Software subscriptions, point-of-sale (POS) systems, communication tools, or cybersecurity measures.

• Market research: Research to understand your customers and competitors.

Recurring costs

• Rent and utilities: Rent, electricity, water, gas, internet, and phone service.

• Salaries and wages: Employee salaries, benefits, and payroll taxes.

• Marketing and advertising: Online advertising, social media campaigns, content creation, or public relations.

• Insurance: Business insurance for protection from liability claims, property damage, and employee injuries.

• Taxes: Income tax, sales tax, property tax, and payroll tax, as applicable.

• Loan payments: Paying off any loans used to start the business.

• Maintenance and repairs: Upkeep of your equipment, facilities, and technology.

• Inventory: The cost of replenishing inventory, if you sell physical products.

• Professional fees: Any ongoing fees for an accountant, lawyer, or other professional services.

• Travel expenses: Any costs for transportation, accommodation, and meals.

• Office supplies: Office materials such as paper, pens, printer ink, and cleaning supplies.

• Training and development: Any employee training.

How to determine your startup costs

Here’s how to get started mapping out your expenses.

List and categorise expenses

Create a comprehensive list of expenses you might encounter, from legal fees to office supplies. Divide your expenses into broad categories such as legal and professional fees, marketing and advertising, technology, equipment and supplies, inventory, and operational costs. Then, categorise your expenses into one-time costs (those incurred only once during startup) and recurring costs (ongoing expenses such as rent, utilities, and salaries).

Research estimated amounts

Conduct the following research to estimate the cost of each expected expense.

• Explore online resources such as the US Small Business Administration (SBA) website, industry-specific websites, and blogs for startup cost checklists and guides.

• Research average startup costs for businesses similar to yours in your industry and location.

• Seek advice from accountants, lawyers, business advisors, or experienced entrepreneurs in your field.

• Contact vendors and suppliers for quotes on specific items or services you need. This will give you a more accurate picture of your expenses.

Create a budget

Organise your expenses into a spreadsheet, listing each item, its category, whether it’s a one-time or recurring cost, and the estimated amount.

• Note which expenses are necessary for launching your business and which can be postponed or reduced.

• Allocate a contingency fund (typically around 10%–20% of your total estimated costs) to cover unexpected expenses.

Review and refine

Review your list periodically and update it as you gather more information, or as your business plans evolve. As you get more accurate cost estimates, adjust your budget accordingly.

How to save on startup costs

Saving on startup costs helps maintain financial health during the early stages of your business. Here are some strategies to reduce expenses.

• Adopt a lean approach by focusing on the key items that add direct value to your customers. Avoid overspending on non-essential features, products, or services at the outset.

• Instead of leasing a dedicated office space, consider virtual offices or coworking spaces. These options can reduce rent expenses and also often come with added benefits such as access to conference rooms and business equipment.

• Rather than hiring full-time employees for every role, outsource functions such as accounting, HR, and IT. This can reduce costs associated with salaries, benefits, and office space.

• Instead of buying new, choose refurbished office furniture and equipment. Many businesses sell their nearly-new, high-quality equipment at a reduced price, which can save you money up front.

• Try to negotiate more favourable terms or discounts from suppliers and vendors, especially if you can offer something in return such as prompt payments or a long-term contract.

• Take advantage of open-source software for tasks such as email, office applications, customer relationship management (CRM), and data management. Many software companies also offer a free tier, which might be sufficient for your needs in the early stages.

• Instead of spending on expensive ad campaigns, start with low-cost marketing strategies such as social media marketing, content marketing, and search engine optimisation (SEO). These methods can be highly effective and cost-efficient.

• Handle tasks internally if you or your team have the skills, such as designing your website, handling basic legal requirements, or managing your books.

• Keep a close eye on your finances. Regularly review and adjust your budgets based on actual spending and income. This can help you avoid overspending and identify areas where you can cut costs.

How to use your startup cost calculations to get funding

Carefully calculating startup costs can help you secure funding for your new venture. Here’s how.

Create a business plan

• Create a comprehensive business plan, integrating your cost calculations and including clear explanations and justifications for each cost item.

• Use your cost calculations to develop realistic financial projections for your business. These projections should include income statements, cash flow statements, and balance sheets – showcasing how your business will generate revenue and become profitable over time.

Customise your pitch to your audience

Here’s what you should focus on when pitching to investors versus lenders.

• Investors: Investors are primarily interested in the growth potential and return on investment of your business. Focus on your unique value proposition, target market, competitive advantage, and scalability. Use your cost calculations to showcase how their investment will fuel your growth and generate returns.

• Lenders: Lenders are more concerned about your ability to repay the loan. Emphasise your creditworthiness, financial stability, and ability to generate consistent cash flow. Use your cost calculations to show that you have a solid plan for managing expenses and repaying the loan on time.

Present a compelling case

• Be up front and honest about your startup costs and financial projections. Avoid inflating numbers or making unrealistic promises.

• Explain why each expense is necessary for your business’s success. Demonstrate how these investments will contribute to your growth and profitability.

• Acknowledge potential risks and challenges that your business might face. Show that you have contingency plans in place to mitigate these risks.

• Demonstrate your passion and dedication to your business. Show that you are fully committed to its success and willing to put in the hard work required.

Seek multiple funding options

Here are the different types of funding options you might consider.

• Angel investors: Angel investors are individuals who invest their own money in startups in exchange for equity. They are often willing to take on higher risks in exchange for potential high returns.

• Venture capitalists: Venture capitalists are professional investors who invest in high-growth potential startups. They typically invest larger sums of money and take an active role in the company’s management.

• Small business loans: Small business loans are offered by banks and other financial institutions. They are typically secured by collateral and require a good credit history.

• Grants: Grants are funds that do not need to be repaid. They’re offered by government agencies or private organisations to support specific industries or causes.