Cost to start your small business: What to budget & how to save

Published Friday 17 October 2025

Table of contents

• What is a startup cost?
• What are the different types of startup costs?
• How to calculate startup costs
• Average startup costs by business type
• Things that affect startup business costs
• How to reduce startup costs
• Track your startup costs with Xero
• FAQs on startup costs

Key takeaways

• Calculate your total startup capital by adding one-time costs plus 3-6 months of recurring expenses, as most businesses need this buffer to survive until they become profitable.

• Prioritize essential expenses first and delay non-critical purchases until your business generates revenue, which can reduce your initial investment by 20-40% without compromising success.

• Research industry-specific cost ranges before planning, since startup costs vary dramatically from $3,000 for service businesses to $200,000+ for manufacturing operations.

• Build an emergency fund covering 3-6 months of operating expenses to handle unexpected costs that typically add 10-20% to your total startup budget.

What is a startup cost?

Startup costs are the initial expenses required to launch and operate a new business until it becomes profitable. These costs help you decide if your business idea is financially viable. They also show you how much capital you need.

Understanding startup costs helps you with:

• Financial planning: Estimate total capital requirements before launch
• Viability assessment: Determine if your business idea is financially feasible
• Risk management: Avoid underfunding that leads to early business failure

What are the different types of startup costs?

Business startup expenses fall into three categories. Knowing these helps you build a budget and avoid missing important costs.

Understanding these categories ensures you account for all necessary costs:

Initial startup costs

Initial startup costs are one-time expenses required to legally establish and physically set up your business, and corporations can often deduct up to $5,000 of these costs for tax purposes.

Here are some essential initial costs:

• business registration: legal formation fees, licenses, and permits
• Equipment and machinery: Tools, computers, and specialized equipment needed to operate
• Professional setup: Legal fees, accounting setup, and initial consultations
• Brand development: Logo design, website creation, and initial marketing materials

Ongoing costs

Ongoing costs are recurring monthly or annual expenses that keep your business operating day-to-day. Most small businesses spend $3,000 to $15,000 each month on ongoing costs in their first year. On average, small business owners spend $40,000 in their first full year.

Here are some critical ongoing expenses:

• fixed costs: rent, insurance, software subscriptions, loan payments
• Variable costs: Utilities, inventory, supplies, shipping
• People costs: Salaries, benefits, contractor payments
• Growth costs: Marketing, advertising, professional development

Unexpected costs

Unexpected costs are unplanned expenses that can disrupt your cash flow and threaten business operations. These typically add 10-20% to your total startup budget.

Common unexpected costs include:

• Equipment failures: Repairs or emergency replacements
• Legal issues: Unexpected compliance requirements or disputes
• Market changes: Rising supplier costs or interest rate increases
• Operational surprises: Emergency repairs, security breaches, or staff turnover

Set aside 3 – 6 months of operating expenses as an emergency fund. This helps you handle unexpected costs without disrupting your business.

How to calculate startup costs

Calculating startup costs gives you a clear financial roadmap and helps prevent underfunding your business. This four-step process typically takes 2 – 4 hours and gives you an accurate budget for your business launch.

Step 1: Identify your essential expenses

Start by listing all your essential expenses. Focus on what you need to operate, such as machinery, initial inventory, and marketing. Make sure you include everything so you estimate your startup capital accurately.

You can make non-essential purchases later.

Step 2: Categorize your expenses

Categorize your expenses into key areas to avoid missing anything.

Here is an example category list:

• Office space and utilities: Rent, utilities, furniture
• Equipment and supplies: Computers, tools, office supplies, machinery
• Marketing and branding: Website, logo, advertising, business cards
• Legal and administrative: Operating licences, permits, legal fees
• Salaries and employee benefits: Initial payroll, contractor payments
• Product or service costs: Initial inventory, packaging

Step 3: Research and compare pricing

Research cost-effective pricing to make your budget go further.

Shop around for the best prices. Consider financing options that let you defer or spread out payments. Use tools that scale with your business to reduce upfront costs.

Costs vary widely depending on region (rents in major cities will be higher), industry (some industries require expensive specialized equipment), and business type (retail businesses will have higher inventory costs than service-based businesses).

The next section explains the factors that affect business startup costs.

Step 4: Total your startup costs

After you identify everything you need and estimate the costs, add them together. Use this formula to calculate your total startup costs:

Total startup costs formula:One-time costs + (Monthly recurring costs × 3-6 months) = Total startup capital needed

Example calculation:

• One-time costs: $30,000
• Monthly recurring costs: $5,000
• 3-month buffer: $30,000 + ($5,000 × 3) = $45,000
• 6-month buffer: $30,000 + ($5,000 × 6) = $60,000

Choose your buffer based on:

• 3 months:Service businesses with quick revenue generation
• 6 months: Retail or manufacturing businesses with longer sales cycles

Make sure you have funds to cover 3–6 months of ongoing costs to tide your business over until it generates a profit.

It can take time for your business to become profitable. The longer you can cover your recurring expenses, the less likely you are to face cash flow problems.

If you're in the US and need help calculating your small business start-up costs, you'll find this free tool useful: SBA.gov on calculating your start-up costs.

Average startup costs by business type

Startup costs vary by industry and business model. A home-based consulting business might need very little capital. A restaurant or retail store will have much higher initial needs. For example, average startup costs for the food and restaurant industry are $375,000.

Online businesses often have lower overhead. However, you may need to invest more in digital marketing, web development, and e-commerce platforms. Knowing your industry's typical cost structure helps you create a realistic budget.

Things that affect startup business costs

Average startup costs range from $3,000 for simple service businesses to $100,000+ for manufacturing or retail operations. Your specific costs depend on five key factors that can significantly impact your total investment.

Cost ranges by business type:

• Service businesses: $3,000 - $15,000
• Online businesses: $5,000 - $25,000
• Retail businesses: $25,000 - $75,000
• Manufacturing: $50,000 - $200,000+

Your business type

Retail businesses

These businesses sell products directly to customers from a physical storefront.

Retail businesses often face higher rents, utility bills, and storage costs. Designing and arranging a physical store costs an average of $147 per square foot.

Online businesses

Online businesses sell products or services to customers through digital platforms.

If you're starting an online business, specific costs like website hosting and e-commerce tools are key. Read more in our guide to starting an online business.

Online businesses usually have lower overhead than physical retail stores. However, you need to invest in a quality website, a secure online payments platform, and a digital marketing strategy. You may also need to lease a warehouse to store inventory.

Service-based businesses

Service-based businesses often have lower overhead because they do not need a storefront or large inventory. However, you may spend more on labor, equipment, software, and licensing or certification.

For example, an accountancy firm leases office space, buys desks and computers, and uses professional accounting software. It also hires skilled employees and contractors. The Small Business Administration suggests that total employee costs can be estimated at 1.25 to 1.4 times their salary.

Your location and industry

Major cities or rural areas?

Doing business in major cities like New York usually means higher rent, wages, and utility costs. A 2024 survey found that Oklahoma, Ohio, and West Virginia are the cheapest states to run a business. Hawaii and Massachusetts are the most expensive.

Niche industries

A business operating in a niche industry generally faces higher upfront costs because it needs specialized equipment, materials, and staff expertise.

For example, a company that makes medical devices needs bespoke machinery, expert-level employees, and materials or components that are difficult to source.

Legal requirements

Some industries – particularly regulated industries – require expensive certifications, permits, and licenses that add to upfront costs.

For example, a food and beverage business may need health and safety permits before it can legally trade.

Marketing and branding expenses

Brand identity

Building a strong brand identity is essential for any new business. It makes the business memorable and recognizable, and shapes customers' perceptions of it.

A new business needs to design a logo and create a website. You also need clear brand messaging, such as your value proposition, to stand out in the market.

Digital marketing

Digital marketing helps you reach customers through social media, email, and search engines.

Digital marketing can increase the initial costs to start a business, but it also puts the product or service directly in front of its ideal customer, which could provide quick returns.

Some digital marketing methods, like social media and content creation (blogging), are budget-friendly ways for businesses to connect with customers. It's also quite easy to track the return on investment (ROI) and scale up profitable methods.

Digital marketing methods are often cost effective. However, running full campaigns can be expensive, especially in competitive industries.

Required equipment and technology

Types of equipment

If you need specialized equipment, it will probably cost more than standard items.

For example, an accountancy firm needs computers, desks, and a printer or two. But a medical consultancy might need to buy specialized, bespoke equipment.

Smart technology

To lower your upfront costs, you can:

• invest in refurbished technology, such as pre-owned devices returned to their original condition
• choose cloud-based software that scales with your business, for example, by starting with a single-user license and upgrading as your company grows

Insurance and risk management

Insurance protects your business from risks and liabilities.

Types of business insurance

Here are the three main types of business insurance:

• liability insurance – covers customer claims related to accidents, injury, and property damage
• workers' compensation – supports employees injured on the job
• property insurance – covers damage to your business's physical assets, like buildings and machinery

Insurance requirements and costs can vary depending on:

• Industry – businesses in high-risk industries like construction need more comprehensive liability and workers' compensation coverage than a retail business
• Location – businesses in urban areas with high foot traffic need more extensive liability insurance than those in rural areas
• Size of the business – larger businesses with more staff, customers, and equipment need more expensive and comprehensive protection

How to reduce startup costs

Reducing startup costs can cut your initial investment by 20-40% without compromising your business's success. Smart cost management focuses on prioritizing essentials while finding efficient alternatives for non-critical expenses.

These proven strategies help you launch lean while maintaining quality:

1. Build a budget

Startups can struggle because they overspend in important areas. Building a budget (and sticking to it) helps you manage and reduce startup business costs. A budget breaks down your total expected costs to help you spend your money wisely and have a clear view of your cash flow.

2. Prioritize essential expenses

To reduce the risk of cash flow problems, focus on the essential expenses at first – that's anything your business needs to operate: industry licenses, equipment, initial inventory, and more.

You can think about buying non-essentials and luxuries later on, once your business is up and running.

3. Choose scalable tools

Scalable software tools let you start with the basics and upgrade as you grow. This helps you keep your initial costs down and plan for the future.

Xero is cloud-based accounting software that grows with your business. With features to streamline tasks and improve cash flow, and integration with over 1,000 apps, Xero has the tools you need as your business expands.

4. Outsource wisely

Outsourcing tasks to skilled freelance accountants and bookkeepers helps keep startup expenses down.

Use the starting a business checklist to make sure you have not missed any expenses. Avoid paying full-time salaries by hiring professionals when you need to, so you can focus on your business and leave things like compliance and organizing financial records to the specialists.

Learn how a bookkeeper can help your business. If you give your bookkeeper or accountant access to Xero accounting software, you can work with them on your financial data in real time.

Track your startup costs with Xero

Managing and reducing your startup costs is easier with Xero.

Xero has everything a small business needs to stay financially organized. Manage your budgets, track expenses in real time, and monitor cash flow from one intuitive dashboard. This helps you make smarter business decisions.

Get one month free to get started today.

FAQs on startup costs

Here are some common questions and answers small businesses may have about startup costs.

Is $10,000 enough to start a business?

For many service-based or home-based businesses, $10,000 can cover initial costs like business registration, website development, and basic marketing. If you need inventory or specialized equipment, this amount may only cover part of your expenses.

Is $5,000 enough to start a business?

Yes, $5,000 can be enough to start a small, low-overhead business, such as freelancing, consulting, or a small e-commerce store using a dropshipping model. Create a detailed budget to make sure you can cover all essential costs.

What are typical LLC startup costs?

Forming a limited liability company (LLC) involves state filing fees, which can range from under $100 to several hundred dollars depending on your state. Other potential costs include fees for a registered agent, business licenses, and legal help to draft an operating agreement.

How much working capital do I need for the first year?

A common guideline is to have enough working capital to cover three – six months of operating expenses. This gives you a financial cushion to manage cash flow while you build steady revenue.

What's the difference between startup costs and operating expenses?

Startup costs are the one-time expenses you incur to launch your business, such as legal fees, equipment purchases, and initial inventory. Operating expenses are the recurring costs you need to run your business day to day, like rent, utilities, salaries, and marketing.