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 organization 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: 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 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, ecommerce 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 labor-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 impacts 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 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

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 organizations 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 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, 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.

Angel investors vs. other types of investors

Before pursuing funding from angel investors, familiarize yourself with other types of startup investors. Here’s an overview of investment options:

• Venture capitalists: Venture capitalists (VCs) are firms or individuals that invest in startups showing strong potential for growth, usually in exchange for equity. Unlike angel investors, they typically invest during the later stages of a startup’s development, after the business has shown some market traction. VCs invest larger sums of money than angel investors and are usually more involved in the direction of the company. They seek substantial returns and typically have a more aggressive view toward scaling the business and achieving an exit within a specific timeframe.

• Seed funds: Seed funds are specialized VC funds that focus on early-stage investments, often before angel investment and larger VC rounds. They invest in startups that have moved past the conceptual stage and have a minimum viable product (MVP) or some initial traction.

• Incubators and accelerators: These programs support early-stage companies through education, mentorship, and financing. Incubators focus most often on the initial development phase, helping entrepreneurs turn ideas into a viable business. Accelerators, on the other hand, look to scale up the growth of existing companies over a short period of time.

• Corporate investors: Some corporations invest in startups to access innovative technologies, enter new markets, or nurture strategic partnerships. These investors can offer ample resources, but they might seek more than just financial returns, such as an ownership stake in the technology or control over the company’s direction.

• Crowdfunding: This involves raising small amounts of money from a large number of people, typically through online platforms. Crowdfunding can be a good option for startups that want to validate their product with a broad audience, interact with potential customers, and raise funds without giving up equity or incurring debt.

• Government grants and subsidies: In some sectors—particularly those involving scientific research, clean technology, or social impact—government grants and subsidies can provide funding without diluting equity.

• Peer-to-peer lending and debt financing: Debt financing includes loans from financial institutions or peer-to-peer lending platforms. This type of financing is typically more challenging for early-stage startups to secure and it obligates a startup to repay the loan, with interest, but it doesn’t dilute ownership.

• Family offices: High net-worth families often have private wealth management advisory firms, known as family offices, that directly invest in startups. These investors can provide substantial funding and might be interested in longer-term investments compared to traditional VCs.

• Angel groups and syndicates: Unlike individual angel investors, angel groups or syndicates pool resources to invest in startups. These groups can provide larger sums of capital and combine the expertise and networks of multiple investors.

Each type of investor offers different advantages, expectations, and levels of involvement. Startups should carefully consider their stage of development, industry, funding needs, and the kind of strategic relationships they want to grow before deciding which type of investor to work with.