How much does it cost to start a business?

What is a start-up cost?

Start up business costs are the initial expenses a new business incurs. Understanding your start up costs is just one aspect of starting a business.

Calculating start up costs is an essential part of assessing whether a new business is viable – it’s an estimate of how much start-up capital you need to get your business going.

What are the different types of start-up costs?

There are three categories of business start-up expenses: initial, ongoing, and unexpected expenses.

Initial start-up costs

These are one-off, essential costs that physically and legally establish the company at the start of its life, like:

• Business registration fees
• Legal fees
• Equipment and machinery
• Branding

Ongoing costs

Ongoing costs are regular, recurring expenses for a business, typically charged monthly or annually. They’re vital as they are the business’s operational costs that cover its day-to-day running.

Ongoing costs can include:

• Rent
• Utilities
• Business insurance
• Finance costs
• Wages and salaries
• Stock and supplies
• Marketing costs
• Software subscriptions

Unexpected costs

Unexpected costs are the unforeseen expenses that arise outside the business’s forecasted budget – like unexpected legal fees, a rise in loan interest rates, or equipment repairs.

You can’t ignore these costs as they can cause serious cash flow problems if a business is not prepared. Some businesses set aside contingency funds as a buffer to cover these unexpected costs.

How to calculate start-up costs

What is the cost of starting a business? Here’s how to calculate the total start-up expenses for a business in four simple steps.

Step 1: Identify your essential expenses

Start by identifying all your essential expenses. Focus on just the essentials, like the machinery needed, initial inventory costs, and the marketing required to get your business off the ground. Don’t miss anything, as you’ll underestimate the start-up capital required.

Don’t worry about non-essential purchases – you can always make these later on.

Step 2: Categorize your expenses

It’s helpful to categorize expenses into key areas so you don’t miss 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

Money’s tight when starting a business, so researching cost-effective pricing will stretch your budget further.

Take time to shop around for the best prices, and think about financing options that let you defer payments or spread them out over time. Tools that scale with the business can also reduce your 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).

We’ll cover the factors that affect business start-up costs in more detail later.

Step 4: Total your start-up costs

When you’ve identified everything you need to launch and you’ve estimated all the costs, the final step is to add it all together. Use this formula to calculate your total start-up costs:

Total start-up costs = One-time costs + (recurring costs × 3-6 months)

For example, what if your one-time costs equal $30,000, and your recurring monthly costs are $5,000? Your start-up costs are:

$30,000 + ($5,000 × 3) = $45,000 for a 3-month buffer.

Or: $30,000 + ($5,000 × 6) = $60,000 for a 6-month buffer.

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

There’s no guarantee when that will be (our XSBI data shows a difficult economic climate for small businesses, with small business sales lagging behind overall GDP growth), but the longer a company can fund its recurring expenses, the less likely it’ll run into cash-flow problems before it’s profitable.

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.

Things that affect start-up business costs

The average cost to start up a business varies according to the type of business (such as retail, service, or online), location, industry, its business structure, and the technology it needs.

Your business type

Retail businesses

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

Retail businesses will likely face higher rents (for a desirable location), utility bills, and storage costs.

For example, a clothing store must budget for a storefront lease, typically in a central location with lots of foot traffic. It then needs to fit out the store with appealing fixtures and lighting, and display lots of inventory in different sizes and styles.

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.

Although this typically means they have lower overheads than physical retail stores, they need to invest in a quality website, a secure online-payments platform and a digital marketing strategy to compensate for the lack of foot traffic. They may also need to lease a physical warehouse to store inventory.

Service-based businesses

Businesses that sell services rather than products often have smaller overheads as they don’t need a fancy storefront or a large inventory, but will likely spend more on labor, equipment and software, and licensing or certification.

For example, an accountancy firm leases office space, buys fixtures and fittings (like desks and computers) and professional accounting software, and hires skilled employees and contractors.

Here’s more information on the differences between online and bricks-and-mortar businesses.

Your location and industry

Major cities or rural areas?

Doing business in major cities (like New York) typically brings higher rent, wage, and utility costs, as these areas are in high demand with a high cost of living.

But while rural areas tend to have lower rents and wages, you may face higher transport and logistics costs as rural locations are often less accessible and may be further away from your customers.

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 licences that add substantially 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 recognisable, and shapes customers’ perceptions of it.

A new business needs to invest in designing a logo and creating a website. It also needs clear brand messaging – such as its value proposition – to differentiate it from the rest of the market.

Digital marketing

Digital marketing is the promotion of your business on 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.

But while digital marketing methods are often cost effective, running entire campaigns can be expensive, especially in competitive industries.

Here’s more practical advice on digital marketing for small businesses.

Required equipment and technology

Types of equipment

If the business needs specialized equipment, it’ll probably cost more than easily accessible 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 might:

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

Insurance and risk management

Insurance protects a business from risks and liabilities.

Types of business insurance

There are three main business insurance categories:

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 a business’s physical assets, like buildings and machinery

Learn more about the types of business insurance.

Insurance requirements and costs can vary

Business insurance requirements and costs depend on things like:

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 start-up costs

When first starting out, you need to keep spending under control to keep your business financially stable. Build a sensible budget, stick to essential expenses, choose scalable tools, and outsource wisely.

In this section, you’ll find several tips and tricks for managing and reducing start-up costs.

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 start-up 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.

Here’s more about budgeting and forecasting.

2. Prioritize essential expenses

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

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

3. Choose scalable tools

Software tools that are ‘scalable’ let you start out with the low-cost basics and upgrade as you grow – a smart way to keep your day-one costs down with an eye to 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 start-up expenses down.

Ensure you haven’t missed any expenses by using our starting a business checklist.

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.

Here’s how a bookkeeper can help your business. And if you give your bookkeeper (or accountant) access to Xero, you can work with them on your financial data at the same time.

Stay on top of business costs with Xero

Managing and reducing your start-up 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, all from one intuitive dashboard – helping you make smarter business decisions.