Cost is one of the biggest barriers to starting a business. As part of our series for aspiring immigrant entrepreneurs, we’re digging into the question of how much money it takes to start a new business. While that answer can vary, this article will help give you an overview as you start your plan.
Once you have a clearer picture of how much money you’ll need to open and operate for the first few years, you can decide whether to take on debt or find investors.
Keep reading to find out how to calculate the amount of money you might need to start a business and how to secure funding.
How much money should I have before starting a business?
There isn’t one answer to this question. How much money you need depends 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 will you need to run your business?
- Lifestyle: What type of lifestyle do you wish to maintain?
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 small business.
Common business startup expenses
Will you need a retail space, restaurant, or office for your small business? If so, research rent rates in your area. Rent is often calculated based on square foot. You’ll 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: Operating out of a home office may reduce your startup costs. Service providers may have the ability to meet with clients in public places like coffee shops. You can also consider using shared office spaces or subleasing from another tenant.
If you have a physical location, you’ll need to pay for utilities like water and electricity. In some cases, leases include utilities, but most people pay for utility costs separately.
Money-saving tip: Eco-friendly fixtures and equipment can help to 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 all of the equipment and supplies you’ll need to run your business and research the price ranges for those items. Don’t forget about computers, printers, and office supplies like ink and paper.
Money-saving tip: Leasing equipment or buying used items may lower startup costs in some cases.
Most small 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.
If you intend to hire employees, you will likely need to purchase these types of insurance:
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 of time.
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 liability 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
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 of these 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.
If you’re selling physical products, inventory will be one of your major expenses. Determine how much of your product you’ll need on hand to open your store. If you’re planning to open a food service business, you can estimate food costs in place of inventory.
Money-saving tip: Wholesalers may offer you discounts if you purchase inventory in larger quantities, but it’s important to not 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 be competing 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.
You can also consider partnering with other small businesses to give your team access to perks. For example your restaurant could 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.
12. Personal expenses
Unless you have another source of income, you’ll need to factor your living expenses into your startup costs. Come up with a monthly budget and figure out how much you need to pay yourself to maintain your standard of living.
How to find money to start a business
Once you have calculated your startup costs, you’ll need to 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 not typically 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 own 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 most 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 small business can be costly and time-consuming. Once your small business is up and running, you’ll need to continue to invest time and money into it 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 bigger income, let you pursue something you’re passionate about, and help you build relationships with your local community.
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