How Much Money Do You Need To Start a Business in the U.S.?

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How Much Money Do You Need To Start a Business

Cost is one of the biggest barriers to starting a business. Calculating how much you can afford and what you need to get started can set you up for success and future decisions. For example, once you know how much money you need to open and operate for the first few years, you can decide whether to take on debt or find investors.

So, how much money do you need to start a business? The answer to this question can vary. Here at Remitly, we created a guide to help you calculate the amount of money you might need to start a business and how to secure funding.

How much money do you need to start a business?

There isn’t one answer to this question. Business startup costs can vary significantly depending on:

  • Business type: Are you a brick-and-mortar, online, or service-based business?
  • Line of business or industry: Materials and overhead will vary.
  • Geographic location: Cost of living factors in here.
  • Employees: How many employees do you need to run your business?
  • Lifestyle: What type of lifestyle do you wish to maintain?

What types of business costs are there during the startup process?

Before we get into how much money you need to get your business idea off the ground, let’s quickly review the types of costs that startups face.

One-time costs vs. recurring expenses

One-time costs are expenses that you only pay once. Some examples of one-time costs are hiring someone to write your business plan, legal fees related to setting up your company’s business structure as a legal entity, and purchasing accounting software.

Recurring expenses are things that you need to continue to pay for with your yearly revenue to have a successful business. Examples include payroll, marketing costs, and rent for your office space.

Fixed costs vs. variable costs

Startup business expenses may be fixed or variable. Fixed costs or fixed expenses are the same all the time, while variable costs or variable expenses change regularly or as your business grows.

Rent on office space is one example of fixed costs. Usually, you sign a lease for a specific term, and your base rent remains the same from month to month.

On the other hand, advertising costs are examples of variable expenses. Many businesses launch advertising campaigns at different times of the year, so in one month, you may spend very little on advertising and have much greater expenses the next month.

Upfront costs vs. installments

Finally, startup costs can be upfront payments or made in installments.

An upfront payment is one that you must pay in advance of receiving something. With installments, the amount you owe is broken up into smaller payments you make over time.

A small business loan from a bank is an example of an installment repayment agreement. Going into a store and paying a few hundred dollars cash for office furniture is an example of an upfront cost.

How to calculate startup costs for a new business

One of the best ways to determine how much money you need to start a business is to estimate your expenses and do the math yourself. Consider the following when calculating the startup costs for your business:

Common business startup expenses

1. Space

Will you need a retail space, restaurant setup, or office space for your startup business? If so, research rent rates in your area. Rent is often calculated based on square footage. You pay for every square foot that your business occupies as well as additional rent to cover the maintenance and upkeep of shared areas, such as the lobby or hallways of an office building.

Money-saving tip: Running a home-based business may reduce your startup costs. Service providers may be able to meet with clients in public places like coffee shops. You can also consider using shared office spaces or subleasing from another tenant.

2. Utilities

If you have a physical location, you need to pay for utilities like water and electricity. In some cases, leases include utilities, but most businesses pay for utility costs separately.

Money-saving tip: Eco-friendly fixtures and equipment can help lower energy costs. LED and fluorescent lighting consume less energy. Other ways to reduce utility costs can include buying energy-efficient equipment and appliances, installing low-flow plumbing fixtures, and opting for heating and cooling systems with smart thermostats.

3. Equipment and supplies

Make a list of the equipment and supplies you need to run your business and research the price ranges for those items. Remember computers, printers, and office supplies like ink and paper.

Money-saving tip: Leasing equipment or buying used items may sometimes lower startup costs.

4. Communications

Most businesses need a Wi-Fi hookup and internet. A landline phone connection may also be necessary for businesses with physical locations. Service providers may be able to use cell phones instead of landlines.

Money-saving tip: Bundling internet, landline phone, and cellular service can sometimes qualify you for discounts.

5. Licenses and permits

Licenses and permits can add to your startup costs. Requirements vary by location and industry. Your state’s Department of State can help you determine which licenses and permits you need and let you know how much they cost.

How Much Money Do You Need To Start a Business

6. Insurance

If you intend to hire employees, you’ll likely need to purchase these types of insurance:

  • Worker’s compensation insurance to cover the medical expenses of employees if they get hurt or become sick due to work
  • Unemployment insurance to cover the funds given to previous employees who are laid off and eligible for unemployment benefits
  • Disability insurance to provide income to employees who become unable to work due to an accident or illness

These insurance policies allow your employees to receive compensation if they become injured or sick due to work, lose their jobs due to no fault of their own, or experience an illness or injury that makes them unable to work for an extended period.

Depending on the type of business you’re starting, you may also need:

  • General liability insurance to protect you from property damage, lawsuits, and medical expenses
  • Commercial property insurance to protect you from losses due to weather, fire, vandalism, or civil disobedience
  • Product insurance to protect you if your product injures or harms a customer
  • Professional liability insurance to protect you if you make an error or mistake that harms someone

Insurance costs vary based on geographic location, the amount of coverage, and other factors.

When comparing insurance startup costs, consider both the premiums and the deductible.

The premium is how much you pay for insurance protection per month, quarter, or year. The deductible is how much you must pay out of pocket before your business insurance covers costs. Generally, policies with higher deductibles have lower premiums.

Money-saving tip: Obtain multiple quotes for business insurance and ask about multi-policy discounts when comparing your options.

7. Lawyer and accountant

Lawyers and accountants can help you avoid costly mistakes when launching a startup. Both professionals can provide expert advice about your business structure and the organizational flow of your company.

An attorney can identify potential areas of personal liability and help you analyze leases and contracts. Accountants can provide advice about tax planning, bookkeeping, and other financial matters.

Money-saving tip: Look for lawyers and certified public accountants that cater to small businesses. These individuals may charge lower rates or even offer payment plans.

8. Inventory

Inventory will be one of your major expenses if you’re selling physical products. Determine how much inventory you need on hand to open your store. If you plan to open a food service business, you can estimate food costs instead of inventory.

Money-saving tip: Wholesalers may offer you discounts if you purchase inventory in larger quantities, but it’s important not to overextend your budget. If you need to lease storage or warehouse space for the extra items, you may be spending more than you’re saving.

9. Employee salaries

As you look for employees, you’ll compete with other businesses to attract qualified candidates. Research how much your competitors currently pay and check the U.S. Bureau of Labor Statistics to determine the salary trends for various jobs in your area.

Offering employee benefits can make positions at your company more attractive to candidates, but this will add extra expenses to your company.

Money-saving tip: If budget concerns limit how much you can pay employees, you might add other perks to entice candidates, like performance bonuses, employee discounts, and free meals.

Consider partnering with other small businesses to give your team access to perks. For example, your restaurant can provide a discount to employees at the local gym in exchange for discounts on gym memberships for your employees.

10. Advertising and marketing

Getting the word out about your business is vital to its success. However, many methods of advertising and marketing cost money. Refer to your business plan and research the average costs of different marketing channels. These might include running Facebook ads or printing costs for paper marketing materials.

Money-saving tip: Word-of-mouth advertising is an affordable yet powerful tool to grow your business. Consider starting a customer referral program that rewards your customers or clients for recommending your products or services. You can also get active in your local community and develop relationships with other small business owners who already have a client base.

11. Making a website

Having an online website is important for businesses across most industries. Although you can create a website for free using a service like Wix or WordPress, custom domain names and design tools that set your website apart from the competition usually involve an annual or monthly fee.

Money-saving tip: Consider trading services or goods with other business owners to get your website made. For example, if you’re opening a brick-and-mortar store that sells office supplies, you could provide a web designer with free merchandise in exchange for their services.

12. Personal expenses

Unless you have another source of income, you need to factor your living expenses into your startup costs. Create a monthly budget and figure out how much you need to pay yourself to maintain your standard of living.

13. Other potential expenses

Depending on the nature of your business, you may have additional expenses, such as the following:

  • Raw materials: Manufacturers, restaurants, and some other businesses may need to buy raw materials or ingredients to operate. As with inventory, you may be able to save money by purchasing in bulk.
  • Shipping costs: An online or brick-and-mortar store may need to ship items to customers regularly. Compare shipping providers in your area to get the best rates. You may find it advantageous to work with multiple carriers.
  • Packaging costs: You may need to add packaging to your startup budget in some industries. First, you may need to hire someone to design packaging to keep your products safe and to complement your brand image. Then, you need to find a supplier to produce the packaging with you.
  • Bank account initial deposit: Even if your business model is a sole proprietorship, you need to keep your business funds separate from your personal assets, and this usually means opening up a bank account. Financial institutions usually require you to make an initial deposit at the time of account opening. However, some banks have low or no minimum initial deposit accounts, so shop around before choosing a financial institution.

How to find money to start a business

Once you’ve calculated your startup costs, find investors, loans, or business grants to help you get the money you need. There are several options for immigrants to find funding. This list of funding resources is a good place to start.

Money-saving tip: You can find funding from multiple places so your debt from one loan or investor isn’t too high. Or, you can offer equity instead of paying back a loan, so you have less debt in general.

Is $500 enough to start a business?

Five hundred dollars is typically not enough money to start a business in the U.S. or Canada. Even freelancers and service providers who work from home might find it hard to launch and market their businesses for such a small investment.

Be wary of programs and companies that promise you can start a business for a small amount, such as $500. These opportunities may be scams or multi-level marketing schemes. Multi-level marketing involves selling products to the public while also recruiting others to sign up to sell under you. In these types of companies, only a small number of people typically achieve financial success.

Always research business opportunities that sound too good to be true. If you believe someone has tried to target you with a scam, report it to the office of your State Attorney General.

Is $10,000 enough to start a business?

For some businesses, $10,000 may be enough to launch a startup, but research suggests that many small business owners need more. In 2021, Shopify reported that the average cost to run a new small business for one year in the U.S. is $40,000.

Is starting a small business worth it?

Launching a startup business can be costly and time-consuming. Once your small business is up and running, you need to continue investing time and money to help it succeed.

That said, owning a business offers many benefits. Among other things, being a business owner might help you be more independent, open doors to a higher income, let you pursue something you’re passionate about, and help you build relationships with your local community.

Take the first steps to owning your own business by creating a business plan. From there, you can develop a startup budget and determine just how much money you need to start a business.