What business startup costs should you plan for: Key examples and financing options

There are many business startup costs to plan for — from utility bills and operating expenses to marketing budgets and employee benefits. But identifying these costs is just the first step. Business owners also must figure out how to budget for these costs and manage their cash flow accordingly. This way, they can be prepared to cover their various expenses, including recurring and fixed costs.

If covering these expenses seem overwhelming, you’re not alone. According to Fed Small Business’s 2024 report, 93% of small businesses experienced financial challenges in 2023.¹ That’s where business financing options come in. Whether you’re looking for a small business loan or line of credit, there are many potential solutions to help you grow your company.

Here, we’ll outline the many costs of starting a business, including tips for how to calculate these expenses, find potential tax deductions, and research business funding options.

Examples of startup costs for a business

There are many small business startup costs to consider — whether you’re running a brick-and-mortar shop or an online store. Regardless of your industry and the types of products you’re selling, it’s important to list and assess these potential expenses so you’re not hit with any surprises as you grow your company.

So, what are startup costs for a business? Some common examples include:

• Product expenses: The costs of manufacturing and preparing products for shipment. These expenses might cover supplies, raw materials, and packaging.

• Operating expenses: The costs of keeping your business running. These expenses might cover insurance bills, accounting software, administrative software, and company registration fees.

• Marketing expenses: The costs of promoting your business and building customer relationships. These expenses might cover logo design, content creation, online ad campaigns, website hosting, flyers, and direct mail brochures.

• Employee and payroll expenses: The costs of hiring, paying, and retaining employees to help run your business. These expenses might cover employee salary, staff benefits, training programs, team-building events, and recruitment fees.

• Office expenses: The costs of maintaining a physical office space. These expenses might cover office rent, furniture, utilities, and insurance.

Can you start a business with low startup costs?

With all of these expenses to consider, you may be wondering if it’s possible to launch a business with low startup costs. While you might use strategies and business models to curb certain expenses, every business generally comes with costs. For example, some businesses use dropshipping to ship products directly from the manufacturer to the customer and avoid paying for inventory storage or physical store locations. However, dropshipping businesses still may have to account for marketing expenses and certain operating expenses.

Monthly vs. one-time startup expenses

Once you’ve made a list of your potential expenses, label them as either one-time or monthly costs:

• One-time costs: These are the initial costs needed to open the doors to your business. While you’ll have to pay them upfront, they won’t recur — meaning, you’ll only have to budget for them once. For example, this might include buying equipment, paying for a business license, or hiring a web developer to build your website.

• Monthly costs: These are recurring expenses that you’ll have to budget for each month. Examples of recurring costs include office rent, employee compensation, and insurance fees.

Calculating both your one-time and monthly expenses will help you prepare your budget and anticipate your cash flow needs.

How to calculate startup costs for small businesses

Once you make a list of your startup costs, you need to know how to calculate them. Meaning, you’ll want a system in place to accurately estimate and plan for these expenses. This can help you figure out how to turn a profit and prioritize certain costs early on, when cash is tight.

When learning how to calculate startup costs for a small business, you can begin with these steps:

• Research every expense item thoroughly: Some expenses, like website hosting or business license applications, will have straightforward prices that you can find online. Others, such as office supplies or insurance premiums, may be less clear-cut. Consider digging into industry forums and publications as well as talking to service providers, mentors, or even similar companies to see how much you can expect to pay.

• Account for fixed and variable expenses: Fixed expenses don’t change over time; these might include your lease or mortgage and insurance bills. Variable expenses, such as payroll and shipping costs, can fluctuate based on a range of factors.

• Don’t be afraid to overestimate: Remember, it’s always safer to overestimate your expenses rather than underestimate them. As you build your business, you want to be prepared for those unexpected startup costs that can arise, like emergency repairs or increased insurance premiums. By overestimating your budget, you can have the capital on hand to sustain your business and continue fulfilling orders.

How to identify tax deductions for business startup costs

You may be able to deduct certain business startup expenses from your taxes. This can help offset a portion of those costs. The question is, What startup costs are tax deductible for a business?

Tax-deductible business expenses might include legal fees, licenses, marketing materials, and business software. However, certain startup costs won’t qualify for a deduction. For example, you may not be able to deduct personal expenses, fines, and research costs from your taxes.

According to the IRS, you can deduct up to $5,000 of business startup costs in the first year you report income for that business. So, if you spend $4,000 to build your business in 2024 but don’t launch and make money until 2025, you can deduct those costs when you file your 2025 taxes. If your startup costs exceed $5,000, they can be amortized (meaning, gradually paid off) over 15 years.²

Navigating business startup cost deductions can be tricky. Be sure to talk to a business financial advisor or tax expert to learn more about your specific situation.

Projecting cash flow for a new business

Cash flow refers to how much money moves in and out of a business over a specified period, such as monthly or quarterly. You can calculate and track your cash flow by creating a cash flow statement. This is broken down into:

• Operational activities: How much cash flows in from sales revenue and dividends; how much cash flows out from expenses needed to run your business, like payroll and rent.

• Investment activities: How much cash flows in and out from long-term investments like assets and securities.

• Financing activities: How much cash flows in from borrowing options like loans or lines of credit; how much cash flows out from loan repayments or dividends.

Cash flow projections are important tools for businesses to manage their finances, track business expenses, and prepare for the future. Instead of simply asking the basic question of “How much does it cost to start a business?” a cash flow projection challenges you to dig deeper and answer, “How much revenue do I need to keep my business running?”

Ultimately, projecting cash flow allows you to anticipate potential cash shortages so you can cut costs, secure additional financing and funding, and maintain a profitable business.

Small business financing options to help with startup costs

If the long list of startup business costs you’ve compiled feels daunting, don’t panic. There are many small business funding options that you can use to help cover some of these expenses. Some business owners, for example, might turn to their personal savings, crowdfunding initiatives, or friends and family for assistance.

Outside of these options, however, small business owners might consider loans and other forms of financing to help with startup costs. They might even combine different startup funding sources to diversify the risk of starting a business.

Small business loans for startups

A small business loan is a type of financing offered by banks, credit unions, or online lenders to provide startups with additional cash flow to get off the ground. Whether you’re hoping to improve day-to-day operations or stock up on more inventory, there are many types of small business loans for startups. There are also specialty loan options like business loans for women and working capital loans.

Common forms of business financing include:

• Traditional small business loans: These are generally received as a lump sum and paid back in set installments, plus interest, over time. Some options, like Small Business Association (SBA) loans and loans for women-owned businesses, are designed for specific types of entrepreneurs or startups.

• Working capital loans: For fast access to short-term funding, business owners might consider working capital loans. These loans can help cover emergency operating expenses, such as during a seasonal drop in sales.

• Business credit cards: Business owners can use business credit cards to more easily pay for and track company expenses, as well access specific rewards and perks for their business.

• Business lines of credit: Similar to a credit card, a business owner might use a line of credit to borrow money up to a certain credit limit, and pay it back each month. With a line of credit, you only have to pay interest on what you borrow.

Alternate startup funding options

Outside of traditional loans and lines of credit, businesses might consider alternative startup funding options, such as:

• Crowdfunding: You can raise funds from supporters, like friends, family, and future customers. Many businesses use platforms to provide perks in exchange for donations.

• Merchant cash advances: Receive a lump sum of funding up front and pay it back using a percentage of your sales each week or month.

• Peer-to-peer financing: Businesses can use peer-to-peer lending apps to connect with investors directly, cutting out middlemen like banks.

How to apply for a small business loan

The costs of starting a small business can add up quickly. Beyond just manufacturing your first products, you have to account for shipping and packaging costs, insurance bills, and employee expenses. If you operate a physical office location or storefront, you’ll also need to cover rent payments, furniture and equipment costs, and utility bills. That’s why it’s crucial to calculate these costs upfront and project your cash flow.

If you’re concerned about preparing for these startup costs, the good news is that there are funding options to help. The SBA offers loans specifically for small business owners, for example. And business lines of credit offer flexible access to funds over time. Ultimately, the financing option you choose will depend on your business needs and specific expenses.

Wondering how to apply for a loan? It’s not as complicated as you may imagine. Depending on the type and terms of the small business loan you’re seeking, your lender will evaluate factors such as your creditworthiness, industry, or business age. Just remember to research each lender’s loan terms, including their repayment periods, interest rates, and any added fees.

Learn more about how to apply for a small business loan.