Business Startup Costs in 2022: What Small Business Owners Can Expect

Business Startup Costs in 2022: What Small Business Owners Can Expect

Business Startup Costs in 2022: What Small Business Owners Can Expect

Starting a new business is exciting, but it also may come with intimidating startup costs. Before you become a business owner, you’ll want to sit down and estimate the total price tag of the venture. In this article, we walk you through the process of calculating each business startup cost so you can launch your business on the right foot. 

What Are Business Startup Costs?

Every new business owner will run into costs associated with launching a business — but the amount you’ll pay depends on your business type and your needs. You’ll want to know ahead of time estimates of the business expenses you can expect so you aren’t hit with surprising costs you can’t afford during the launch process. 

Business startup costs depend largely on the type of business you open, which can be:

  • Brick-and-mortar
  • Online
  • Service provider

When you start a new business, you may pay for things like business formation fees, marketing costs, business insurance, a website, and more. We cover each possible expense in detail below.

How Much Does It Typically Cost to Start a Business?

The amount you’ll pay to start a small business will depend on the business itself. According to a 2021 Shopify survey, small business entrepreneurs spent $40,000 on average in the first year of launching a new business. But this is an average. 

A small business with a physical location will come with a heavier price tag than a business that is run completely out of a home. You’ll have to pay for things like rent or a commercial mortgage, furniture, and physical marketing materials. But you’ll also need more insurance coverage since you’ll have a business location where customers or employees could hurt themselves. 

You can use this startup costs worksheet from the U.S. Small Business Administration (SBA) to help guide you through your estimate process.

10 Most Common Startup Expenses

In the first year of running a small business, you’ll likely encounter two types of costs:

  • Capital expenditure: One-time purchase or debt that invests in the future of your business. This can include purchasing new property, facility upgrades, updated equipment, or patents. 
  • Operating cost: Ongoing expense that allows your business to run in an efficient and productive way. Marketing, payroll, insurance, and research falls into this category.

The amount you pay for each operating cost depends on how much of the work you do yourself and how much you offload onto a professional that you’ll have to pay.

Here are the 10 startup expenses you’re most likely to encounter.

1. Research costs

Conducting market research before you launch a business can bring clarity to how effective your products or services will be. You can subscribe to a marketing research platform for a more affordable but more do-it-yourself option. Or you can hire a market research firm. According to the Vernon Research Group, hiring a market research firm can cost anywhere from $4,000 to $50,000, depending on the type of research you conduct.

2. Getting a business plan written

A business plan is an essential document that establishes your business structure and goals. You can write your own informal business plan or subscribe to software like LivePlan to guide you through the process, which charges a monthly fee. 

Otherwise, you can turn to a business plan company to complete it for you. If you hire a professional service to write your business plan, you can expect costs to start around $1,500 and increase with complexity. 

3. Business formation fees

How much you’ll pay for business formation depends on the business entity type you choose. A sole proprietor won’t have costs directly associated with founding a business, but an LLC will need to pay to file articles of organization (or if you’re incorporating, articles of incorporation). Filing fees depend on the state you live in but typically cost between $50 and $100, and may cost as much as $300. 

You may also have to pay for a state or federal business license, depending on your industry. Associated costs depend on the license.

4. Insurance and permits

Business insurance can provide protection if you need to pay for claims against your business. Without insurance, you’ll have to pay upfront for the damages and potential legal fees. You’ll likely need different business insurance if you run a fully online business than if you operate an office space, for example. 

The most common types of business insurance are:

  • General liability insurance: Protects against “general” claims for property damage, bodily injury, or personal injury. The cost is determined by how risky your industry is, like retail vs. construction. 
  • Errors and omissions insurance: Covers mistakes you or your employees make against customers or clients. The price depends on factors like the size of your business, the industry, revenue, and its employee training process.
  • Commercial property insurance: Protects offices or brick-and-mortar locations against damages from instances like flooding, fire, theft, or vandalism. The cost depends on factors like the property value and its assets, as well as its location. 
  • Workers compensation insurance: Pays for medical and benefit costs for employees that get hurt or ill while working. The cost of your workers’ compensation policy depends on the state, business size, payroll, and your industry’s risk. 

5. Website

Having a business website that looks good and is functional is essential — it acts as the face of your business. Hiring a web design company to create a website for you can cost into the tens of thousands of dollars, but it can be worthwhile to pay this cost upfront to ensure that your site is everything you need it to be. You’ll also need to consider hosting options, which can determine how quickly your website loads when customers visit, and how much traffic your site can handle.

There are several affordable do-it-yourself website builders and hosting services out there, including:

  • Squarespace: You can use this website builder to create a business website for between $16 and $49 per month. 
  • Weebly: Create a business website for between $0 and $26 per month. 
  • Wix: Its website plans cost between $16 and $45 per month. 
  • Shopify: You can set up an online shop for between $29 and $299 per month. 

6. Setting up accounting systems

You don’t want to skip figuring out your accounting process before you start a business — or you may find yourself under a mountain of paperwork come tax time. Some accounting solutions cost money. To start with, opening a business bank account is a great way to separate your personal and business expenses from the beginning. (And you may pay a monthly fee, depending on the account). 

In terms of tracking your transactions, you can do it for free manually using a spreadsheet or pay for software that automates much of the process:

  • QuickBooks: $30 to $100 per month
  • FreshBooks: $15 to $50 per month
  • Xero: $12 to $65 per month
  • Wave: Accounting software is free

Connecting your business checking account to accounting software can simplify your bookkeeping and accounting. You can import your transaction information to easily see your business’s cash flow and expenditures. When it comes time to pay your business taxes, you can send this information directly to your bookkeeper or CPA. 

7. Marketing expenses

You may not need to pay for marketing, but if you do, it’s good to keep costs below 10% of your total budget. Your business may benefit from physical marketing materials, like signs or mailers, or from online marketing. Social media marketing can be free or paid. 

Come up with a small business marketing plan to make sure you are clear on your goals and not spending money without getting results. 

8. Technology and equipment fees

An office or physical location can eat up a large portion of your budget. Whether or not you have an office that staff comes into, you’ll need to equip it. You’ll need reliable technology like a computer and internet access to run any modern business. If you have a physical location or staff office, you’ll need things like office supplies and office furniture. Costs depend on how large the location is and the types of equipment you need.

9. Inventory fees

If you’re opening a business that requires you to keep inventory, like retail or wholesale, you’ll need to estimate how much your initial inventory supply will cost. You’ll want to consider stocking up more inventory in the beginning than you might later. The cost depends on how much inventory you need and what you’re ordering. 

10. Hiring employees

According to Glassdoor, it costs around $4,000 on average to hire someone new. These costs include background checks and drug testing, marketing, posting on job boards, and any internal expenses. These expenses will vary based on your business, but if you’re planning to hire employees for your new business, you’ll need to budget accordingly.

In Total, How Much Startup Cash Will You Need?

As mentioned, the average business startup costs fall around $40,000, but you can do it for much less or much more. The amount you pay for organizational costs depends on factors like your business size, the industry, the state it’s located in, and whether or not you have employees. 

If you complete your startup cost estimate and realize you don’t have enough cash on hand to launch — even though you’re ready in every other way — consider turning to lenders. Small business lenders can give you a leg up to start a new business and help you avoid waiting around for years before launching. 

Nav shows you your best options for small business loans if you need cash for things like capital expenses or business credit cards for help with cash flow. Create a free account at Nav.com to see the financing options you’re most likely to qualify for instantly.

Can You Write Off Startup Costs?

Yes, you can deduct certain startup costs on your tax return, but not all of them. The IRS provides a useful breakdown of what is allowed for a tax deduction for a new business. However, it’s a smart idea to hire a professional accountant to complete your tax return for you because of the complexity involved.

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