By Daniel Lewis,
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Unfortunately, the odds are stacked against small business owners, with a majority falling within their first year.

Many of these failures could potentially have been prevented with good financial planning. The fact is, a business fails because it did not manage its budget properly. It’s all too easy to get caught in a liquidity trap and fail to make payments on time.

Below, we’ll teach you how to estimate the cost of starting a business from scratch.

Effect of Business Model on Initial Costs

First, you need to gauge how much you can expect to pay depending on your unique business model. Your business model will play a huge role in terms of what you’ll be paying at the beginning of the enterprise. It will also affect what kind of financial options are most suited to you. Below is a table of the costs per business type.

Business Model Office/Lease/Premises  Inventory Equipment Wages
Small Physical Establishment (Shop, Restaurant, etc) Yes Yes Yes Yes
Franchise Yes Yes Yes Yes
Online Freelance Services Enterprise No No No No – Some contractors required
DropShipping No Yes No No – Some contractors required
Tech Startup Yes Yes Depends Yes

As you can see, the cheapest model is the online one, where there are little upfront costs. The riskiest and costly are often small local businesses with offices/premises, inventory, equipment, and wages to pay.

You also need to consider the startup costs. Name registration is typical $60. If you wish to start an LLC or Corporation, you may have to pay hefty incorporation and annual fees. For example, in California, there is an $800 annual franchise tax, a $20 filing fee, a $100 initial report fee, and a $115 fee for filing the Articles of Incorporation with the Secretary of State.

You may also need to take into account the cost of researching your target market as well as putting together a business plan.

Two Types of Expenses

One of the first things to understand about startup costs is the difference between operating expenses (‘OPEX’) and capital expenses (‘CAPEX’). Both of these are treated differently for accounting and taxation purposes. 

  • Operating Expenses – These are regular expenses that occur during your daily business operations. It would include inventory, wages, utilities, rent, contractor fees, office supplies, insurance, etc.
  • Capital Expenses – This is related to significant investments in the business. An example would include the purchase of heavy equipment, property, or the acquisition of a different enterprise. It is also related to intangible assets such as patents. 

It’s important to separate these expenses, though your accountant will likely be doing much of this. You can then compare the assets at your disposal and measure them against the estimated expenses.

List of Typical Expenses

Below is a list of some of the standard expenses you will have to pay when starting a new business. What compounds the issue is that you cannot know how much it’s going to cost before you reach out to providers for a quote.

And you then have to decide what tier of service you want – You can’t cut costs forever. If you cut back too much and deliver an inferior quality of service, it will end up costing you money. Some of the typical expenses will include:

  • Office/Premises
  • Office Supplies
  • Equipment
  • Communications
  • Utilities
  • Licenses and permits
  • Insurance
  • Lawyer
  • Accountant
  • Wages
  • Advertising and marketing
  • Market research
  • Printed marketing materials
  • Making a website
  • Web Hosting
  • Banking fees
  • Filing, Formation, registration fees

Adding it All Up – Budget and Analysis Tools

The first thing you can do is simply get an Excel spreadsheet and calculate it all out. It’s not going to be completely accurate (budgets never are) but it can give you a good estimate. You can average out a typical cost for a service such as a business plan, marketing, SEO per month, etc. Check out our free Excel templates for businesses.

There is zero need to outsource this step to a third-party. As a business owner, you should be 100% involved in the profit and loss of the company and know exactly where you intend to spend funds. By making a list of what things cost, it will give you a good idea of where you can cut back and what items are really necessary.

Check out this post for a comprehensive list of tools that can help you to manage your business, in terms of time and financial accounting. You can make use of certain automation tools to reduce your budgeting costs.

In terms of estimating costs for starting a small business, take it month by month. Outline what services are absolutely essential to your business and set a maximum budget of what you are willing to spend on it. Think of all the essentials, and add 10% to be certain.

Unforeseen Expenses

There are many things that you simply cannot foresee. This is why you really need to have extra capital at hand to weather the storm. It’s a sad fact that most Americans are living paycheck to paycheck. The situation is quite similar for small business owners in the USA. At the time of this writing, the Corona Virus is wiping out many businesses that cannot stay open with the setbacks.

Aside from global calamities, systemic collapses, and natural disasters, it is still easy to hit a bad patch. The demand for your market could easily be disrupted. A competitor could start-up next door and undercut your business. A worker or customer could file a claim against you.

Fraud could be committed, or a supplier might go bankrupt, a credit might fail to pay. This is why you need to be more than diligent – you need to save for an inevitable rainy day with high-quality loans and finance.

Starting Capital – Loans and Finance

One of the best ways to prepare yourself against adversity is to have strong capital reserves. You can even take out a line of capital and use it only when you need it. This way, you will only pay minor fees for the line of credit and only have to use it when you need it.

Other types of loans include term loans, Equipment Financing, SBA loans, and angel investment. What route you take will depend on your unique business model. Bur regardless of business model, every enterprise needs solid financial backing. Below, we have made a list of the major loan options and their characteristics.

Loan Type Time to Acquire Interest Rate Difficulty to Obtain
Online Term Loan 48 hours High (8% – 20%) Easy
SBA Term Loan 1-3 Months Low (4%-10%) Difficult
Equipment Financing 7 days Low (4 – 10%) Easy
Family/Friends Instant Zero or Low Depends
Business Lines of Credit 48 Hours High (10% – 20%) Easy

The Importance of Timing Startup Costs

Timing is everything when it comes to business. It is just as important to stay on top of costs as it is to move forward. For instance, if you have huge capital reserves but forgot insurance, you could easily face disaster.

The business has to grow organically over time, so you need to be patient. And everything has to move forward in unison. If you grow too much in a certain area, such as marketing, then you will often be overextended and possibly pulling resources from other areas.

Remember to take it in order – you need to form the company and register a name before you do anything else. Timestamp all of the items so you understand what services have to be paid for in the right order, instead of having an absolute figure.

Pay for the essentials, and then pay for things you really need, as you need them. Play the long game and make a steady but consistent profit as opposed to taking undue risks. Above all, remember to have a strategy in place to estimate upcoming costs on a monthly and quarterly basis.

It’s also important to stay on top of taxes and regulatory filings. Key IRS dates to remember are:

  • January 31st – W2 Form to Employees
  • February 29 – IRS Form 1096 (Physical)
  • April 1 – IRS Form 1096 (Electronic)
  • 15th April – IRS Form 4846 (Final Taxation Date for Sole Proprietors)
  • 15th March – IRS Form 4846 (Final Taxation Date for Partnerships)


Good business models always have solid financial foundations to stand on. A bad month can wipe out a perfectly good business – the ongoing Corona Virus is evidence of this.

While you can’t prepare for the unpreparable, you can make sure that you have the right capital at hand so that you have something to reach for when times are tough. There are many high-quality financial providers on the market and no excuse for US business owners to avoid them. 

Daniel Lewis
Daniel Lewis
Daniel Lewis is an MBA accredited investment professional who wants to assist small business owners to gain access to finance. After going through many channels for funding, Lewis has found that getting the first loan right is vitally important for future success.