Breaking Down Business Startup Costs: What to Expect
Have you heard of the Paycheck Protection Program? This program is part of the recently passed $2.2 trillion stimulus package and is meant to provide relief for small businesses that need extra cash to cover payroll.
The program offers loans up to $10 million to small businesses. These loans are calculated using 250% of your average monthly payroll in 2019. The program is only being offered through SBA authorized lenders.
These loans are eligible to be forgiven if at least 75% of the funding is used to pay workers and if no worker is compensated above $100,000. It’s currently not clear if that maximum includes benefits. Those who can’t get the loan forgiven will have to pay it back in two years at a 0.5% interest rate after six months of interest deferment.
Applications open on Friday, April 3, and close on June 30. The application consists of a two-page form in addition to required documentation.
If you’re interested, be sure to apply at a Paycheck Protection Program authorized lender.
What is the average startup cost for a small business?
A survey from the Ewing Marion Kauffman Foundation in 2009 lists the average startup cost for a small business at an oddly precise $31,150.1 However, according to Intuit QuickBooks, most small businesses start with only $10,000 or less.2 That’s quite the difference. So what costs will you face when you start your business? The answer, of course, depends on your business model.
How much does it cost to start a business?
People tend to believe that starting a business requires an endless amount of money. On the contrary, freelancers, such as sole proprietors, and home-based businesses can get going for practically nothing. If you’ve decided you’d like to freelance or work from home but haven't settled on a business idea, there are several great options choose from. Other businesses, such as construction companies, trucking companies, restaurants, or franchises can have much higher startup costs.
Business startup cost examples
Startup costs are expenses of getting a business up and running. These costs may include several different expenses:
- Advertising and marketing
- Office space
- Borrowing costs
- Equipment and supplies
- Insurance, license, and permit fees
- Research expenses
- Payroll expenses
- Salaries or wages
Although starting a business can be a whirlwind, it requires time, hard work, and—you guessed it—money. Depending on your business model, your business idea will have a hard time flourishing without capital and a realistic estimation of startup costs.
What startup expenses can I deduct from my taxes?
If you’ve officially started a business, you’re entitled to deduct specific startup costs and business expenses from your tax return. Any startup expenses you can't currently deduct have a 15-year amortization period (or a length of time allowed to write off expenses) from the first month you begin business. The IRS divides eligible startup costs into three different categories:
1. Preparation costs
Before officially opening your doors, you’ll likely spend money on traveling, advertising, wages, or employee training. Business owners should treat these costs as capital expenses—which are all deductible.
2. Research costs
Depending on your trade or business, you may need to perform research and survey certain markets to help your business succeed. Any costs associated with this type of research can be deducted.
3. Legal and organizational costs
Setting up a partnership or corporation typically requires legal fees, accounting fees, state organizational fees, and filing fees. We know what you’re thinking—that’s a lot of fees. But you can rest easy knowing that these costs are 100% deductible.
What are funding options for small businesses?
To help your company thrive at every stage, you may need to find ways to externally fund your business. Working capital can help pay for expenses, one-time costs, full-time employees, and more. Here’s a roundup of funding options for your small business.
Friends and family
This is perhaps one of the most popular ways to find outside funding. However, if your business goes under and is unable to pay the loan back, be prepared to attend some rather awkward family gatherings. So it’s important to think long and hard before going down this road—regardless of the dollar amount.
If you’re hesitant to reach out to friends or family, we have your next course of action. Consider applying for an online small-business loan to fuel your business. Most traditional banks and lenders like to see a personal credit score of at least 620. If you’re trying to work your way out of a credit score hole, we recommend microfinancing, otherwise known as microlending or microcredit. There are also a number of small business loans for startups that are great for brand-new businesses without cash flow or profit history. Regardless of your unique situation, the variety of loan options should encourage you and ease your worries.
If you’re looking for your personal Mark Cuban to be your angel investor for your small business, we recommend applying for Shark Tank. If that doesn’t work, we have the next best thing: crowdfunding sites like Kickstarter and Indiegogo can help you reach your funding goal. Equity crowdfunding, otherwise known as crown investing, connects you with potential investors who provide funds in exchange for a stake in the business. These new and innovative sites are truly lightning in a bottle.
If you’re lucky, an advisory firm may advise their clients to invest in your product or service. To show your investors that you’re serious about utilizing their capital, you’ll need a well-constructed startup financial model. It should not only be properly structured and compelling but also lay out financial projections, customer lifetime value, fundraising goals, unit economics, and expenses. And instead of reinventing the wheel, consider using a template.
This option should be your last resort. Although personal loans are a quick way to inject some cash into your business, they tend to be higher risk and more expensive. So if you end up going this route, it’s important to pay off the debt as soon as possible. Otherwise, you may harm your personal credit score.
When it comes to startup costs, they can vary depending on your type and size of business. But no matter what your business ends up being, take the time to carefully estimate and plan for your startup expenses. It never hurts to be prepared.
Have some experience estimating costs for a new business? Tell us what tips you found most helpful below!
At Business.org, our research is meant to offer general product and service recommendations. We don't guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.
- The Ewing Marion Kauffman Foundation, “The Use of Credit Card Debt by New Firms”
- Intuit QuickBooks, “Did You Know? Most Small Businesses Start with $10,000 or Less”