ComplianceFinanceLegalJuly 06, 2020

Figuring the costs of setting up your new business

small business services

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It takes a lot of time -- and money -- to get a new small business up and running. Make sure you don't overlook any of these expenses, so you can improve your changes for success. It is important to determine how much it will cost you to open your doors for business.

Startup costs can be broken into the following categories:

  • hiring professionals,
  • getting insurance,
  • planning advertising and marketing,
  • hiring employees,
  • planning the physical space,
  • remembering special considerations for retail businesses,
  • accounting for miscellaneous costs and
  • raising money.

The first time you go through the costs to start up your new business, you don't need to be particularly precise--a rough idea is sufficient. To determine how much you'll need for the first few months of operation, see working capital needs.

In addition, before diving in, you may want to look in the Business Tools section at the initial cash requirement worksheet for a new business. The worksheet is set up to forecast cash requirements for the start up of a new business. The worksheet is formatted with most of the cash requirement categories. All you have to do is put in your numbers. Once you've downloaded the worksheet, you can modify it to fit your own needs.

Hiring professionals to keep your business on track

Among the professionals you may need to work with are a lawyer, an accountant, and, in some cases, a marketing or business consultant. You might as well think of them as being part of your business family because they'll play an extremely important role in your business's success or failure.

Work smart

As you work through these topics, don't forget that your accountant can be a great source of information with regards to start-up costs. If your accountant has small business experience, he or she should be able to tell you whether your estimates are on target.

The general questions to ask yourself to determine if you should hire a professional are:

  • Do they have expertise you need but personally lack?
  • Do you have the expertise, but they can do what they do cheaper than you can do it?


Suppose you know how to prepare your own financial statements and tax forms. If, however, you lose business because you're too busy doing your own accounting work, you'll have to determine whether the lost business income is greater than the cost of hiring an accountant. If it is, you should hire the accountant.

The two professionals you'll almost certainly need to work with are an accountant and an attorney. Let's take a quick look at the tasks they'll perform for you:

  • Accountant — can set up your bookkeeping; can set up your system for handling the cash you receive; can do your taxes and advise you on how to operate your business to reduce your taxes; can provide financial planning advice.
  • Attorney— can help you choose the form of business you need and can help you prepare the necessary paperwork; can help you make sure you've complied with all local laws; can help you draft contracts and leases; can provide legal advice for many of your business decisions; can defend you if you get sued and can advise you if you are considering legal action against someone else.

To find out how much a lawyer and an accountant will cost, ask your friends and business associates or call some lawyers and accountants and ask them. In most cases, a lawyer or an accountant will not charge you for an initial visit, so you can do some free comparison shopping. Make sure you call and confirm that the initial visit is free before you go.

Once you've chosen a lawyer, he or she may ask you to pay a retainer fee, which is a lump sum that you pay up front and then draw against every time the lawyer advises you. This practice is becoming increasingly common because lawyers are growing wary of providing advice on credit to businesses that may fail before the bills are paid. Some lawyers may ask you for a retainer of as much as $2,000 or $3,000. Ask around to find what others are paying.


Don't be scared off by a lawyer who wants a retainer. In some ways, it's a good method for budgeting your legal costs since you know up front how much you'll be spending.

Getting insurance protects you from risk

As a new business owner, your insurance needs will depend upon the type of business you run. For example, a self-employed computer consultant who operates out of her home will have insurance needs that are significantly different than a 10-employee company that manufactures explosives. The cost of insurance, therefore, will also depend upon the type of business you operate.

If you don't have an insurance agent, ask your small business friends and associates who they use. Another source that may be more focused, more experienced, and less expensive is your industry association. Industry associations usually provide a large, predictable, homogenous pool for underwriters, which generates lower rates. They can often provide one-stop shopping for both business and personal insurance needs (e.g., liability, property and contents, life, medical, etc.).


You can sometimes save money by having all of your insurance needs met by one company. Thus, when comparing prices, don't look at just one type of insurance to make your decision. Look instead at whether you can save money by having a single company handle all of your needs.

One good way to do this is by contacting an independent insurance agent who can do the shopping for you.

Obtain bids for a complete insurance package from several different insurance agents and companies. When comparing insurance proposals, make sure you are not inadvertently comparing apples and oranges. Make sure the packages have very similar types and amounts of coverage. Below are brief descriptions of the various types of insurance that your new business may need. Remember, no two businesses are alike. Some businesses may require additional types of insurance and some may require only a few of these mentioned.

  • Property insurance— this insurance will cover losses arising from physical damage or loss of use of the property or theft losses. Remember to insure against the losses of the contents of your business, too. It is very possible to have a larger investment in machinery and equipment, inventory, and business records than the actual business building.
  • Business interruption insurance— this type of insurance will pay your bills while you are out of operation for a covered loss, such as a fire. Just because your business is shut down does not mean that your bills will stop. This type of insurance can also provide your business with the lost profit protection, although such coverage is expensive.
  • Liability insurance— this type of insurance protects you if you are sued. It will pay judgments against you up to the policy limits, as well as the legal fees you incur in defending yourself. Some small businesses, such as doctors and lawyers, will also need to carry professional liability coverage, which protects the insured against lawsuits that result from professional error.
  • Key person insurance— this type of insurance includes coverage for the owner's or manager's death or disability. It is meant to get a company through the tough times following the loss of a key person and includes a buyout of the deceased owner's interest at the time of death.
  • Workers' compensation insurance— this type of coverage is necessary for those small businesses that have employees. It varies by state and employee job duty classification. The cost will vary based upon the worker classification.
  • Health insurance— this type of insurance pays the medical bills for covered illnesses and injuries. Buying insurance through your business can be cheaper than buying an individual policy for yourself. Because of the high costs, most small employers don't offer health insurance as an employee benefit.
  • Life and disability insurance— these policies provide covered individuals or their families with income in the event of death (life insurance) or a disability not related to work (disability insurance). These types of insurance are relatively inexpensive.

Planning your insurance needs is just as important as any of the other planning you will do or have done for your new business. It's possible to reduce your overall insurance costs by instituting certain safety procedures. Ask your insurance agent what steps you can take to reduce your costs.

Work smart

You should reevaluate your total insurance package on a regular basis. Are there additional risks that you want or need to insure against? Is the amount of insurance coverage high enough or is it too high? When you reevaluate your insurance, make sure you are insuring only assets that you still own and that some assets are not uninsured.

For a more detailed explanation of all your business insurance options, see our discussion of insuring your office and equipment.

Estimating advertising and marketing costs

Every new business has unique advertising and marketing needs. The amount you will have to spend will depend upon your industry and your competition, as well as your personal philosophy.

Some new businesses operate with virtually no advertising and marketing budget, while others spend freely. Whatever your level, your first step should be to buy good business cards designed by a professional.

Your second step should be to have your business's name placed in the Yellow Pages. Be careful about the number of categories under which you choose to place your name--a relatively inexpensive means of advertising can quickly become expensive.

As the number of online businesses has proliferated, creating and maintaining an internet presence has become increasingly important. The site may serve exclusively to advertise the business, or it may also service as another channel through which goods or services are sold.

Work smart

If you're on a tight advertising budget, consider giving free samples of your product or service for a short time. Obviously, this won't work for everyone (particularly if you own a car dealership), but it's a great way to get your product or service out to the public at a low cost.

The most important point to remember in setting an advertising budget is to spend wisely. You want to make sure that you're reaching your target market in an efficient manner.

Hiring employees requires planning

As a new business owner, one of the first decisions you'll have to face is whether to hire someone to help you.


Employee expenses are often the largest single category of operating expenses for a small business, and the costs can make the difference between profitability and going out of business. It is also difficult to hire and fire employees, both psychologically and legally. The small business owner should consider applying "just-in-time inventory" planning to employee usage as well, utilizing part-time employees or single-project contract labor (e.g., from temporary help agencies) to obtain additional help exactly when and for as long as needed.

The way to determine employee-related costs is to project your staffing needs. When you think about your need for employees, remember to take into account non-working time, such as vacations, absences, and employee turnover. For example, what happens if you hire one full-time person and he wants to take a vacation? What will your new business do while he's on vacation?

Tools to use

Included among the Business Tools is a projected staffing schedule. This worksheet is an Excel template.

The worksheet is set up to be used for projecting and completing your new business staffing arrangements for a weekly time period. All you have to do is put in your employee names and the hours to be worked and it will show you and your employees at a glance the weekly staffing arrangements. This tool provides an example and a template for a weekly staffing schedule.

Once you've downloaded the worksheet, feel free to modify it to fit your own needs.

For a detailed explanation of employee hiring, including specific steps to take in the hiring process, see our discussion of recruiting and hiring.  For some tips about low-cost alternatives to hiring a full-time employee, see our discussion of choosing a staffing method.

Planning the physical space

One of your biggest outlays will be the cost of setting up your physical space: your storefront, your office, your plant, or the business space in your home.

Here's a look at the costs associated with your physical space:

  • Lease payments— Include amounts that will need to be paid for equipment and facility leases before opening. Determine this amount by bids and contracts. Expect to pay several month's worth of lease payments before you open the doors.
  • Fixtures and equipment— Include in this amount all fixtures and equipment needed for your new business. Finance this amount on a long-term basis if possible.
  • Installing fixtures and equipment— This should be the amount necessary to make all the fixtures and equipment ready for use. This should also be able to be bid in most cases.
  • Decorating— This will include cosmetic improvements to the new business facility. Usually it is possible to get bids and ideas from interior decorators. Even if you are able to perform the decorating yourself, the bid will give you a good estimate of expected cost.
  • Remodeling— If your new business location will require any remodeling, include it in this category. Obtain bids from contractors for your remodeling. Contractors will usually provide free bids after you have the plans drawn up.
  • Signs— Signage costs will vary. Obtain bids from sign companies. Finance this amount through long-term borrowing, if possible, or it will hurt your short-term cash flow.
  • Supplies— Include all office, cleaning, and employee supplies in this amount.

See also our discussion of equipping your business or more details on facilities and equipment. If you intend to work from home, your costs will be much less than if you rent space outside the home. For more information on home-based businesses, see our discussion of setting up your home office.

Special startup costs for retail businesses

If you decide to open a retail business with a storefront (as opposed to a mail- order or internet business, for example), you'll have some special cost considerations that a home-based business won't have.

  • Beginning inventory— This is the amount of inventory you must have in place on the first day you open the doors for business. This could be a significant amount, so make sure you get an accurate estimate. Your suppliers, if you know who they will be, should be able to provide you with some help on required inventory levels for your type of business.
  • Building construction, fixtures, and decorating— If you plan to build or have site improvements, get bids. In the construction industry, it's customary to provide free bids after you have a design drawn up. Unless your expertise is estimating construction costs, do not try to estimate costs yourself.
  • Cash— Include in this the amount of cash you'll need to conduct cash transactions with customers.

Miscellaneous startup costs can add up

There are many startup costs that don't fit neatly into any category, but still need to be considered if you're to get an accurate picture of how much it will cost you to get your business off the ground:

  • Deposits— Include in this all amounts required by the various utility and telephone companies. The utility companies will be able to provide you with an estimate based on the type of business. Some estimates could be significant, depending on your business, e.g., if you plan to open a telemarketing company, expect to have a high telephone usage deposit.
  • Licenses and permits— This amount will include all fees charged by local, state, and federal agencies. If your new business is in a highly-regulated industry, expect these charges to be somewhat high. For example, an elder-care facility or a company that handles toxic substances will have higher fees than a clothing store.
  • Miscellaneous— This is the catch-all for the cash needs that will not fit in other categories. In some instances, your business may have several items that are not included in the rest of the list.
  • Unanticipated expenses— A good rule of thumb is to compute the unanticipated expenses as 10 percent of the total estimated cost of your startup expenses.

Cost of raising startup money

We're attempting to determine how much money you need to open your business to decide if you need to get a loan for a portion of it. Don't forget that the interest on any loans you take out becomes part of the money that you need!

There are several different sources for obtaining the money you'll need to start your new business. When we say "obtaining the money," we're really talking about two separate processes because banks will not lend business owners 100 percent of the funds needed to start a new business. Banks and other lenders will want you to use some of your own money.

By most estimates, a lender will expect you to contribute at least 25 to 30 percent of the startup costs. Thus, if you estimate that your startup costs will be $50,000, you will need at least $15,000 of your own money. What if you don't have $15,000? Let's take a look at some of the ways you might raise the money:

  • Personal savings: You might have the money in savings, but be careful about using your retirement savings to fund a new business. There is always a risk in starting a new business, so make sure to evaluate your alternatives carefully. In fact, unless you have funds that exceed what you intend to use as a retirement fund, you should probably raise the money elsewhere.
  • Friends and family: Friends and family are normally the least expensive way to raise funds because they may not charge you interest, they won't require you to submit a business plan, and they're usually the only ones who will fall for your pleas of sympathy. (Try the, "I don't have any collateral or business experience but I really need the money" approach on your banker and see if it works. If it does, please send us the name and address of our new banker.)

Work smart

If you borrow money from your family or friends, put it in writing and treat it like any other loan. If they aren't concerned about the interest rate they will receive, set up the loan so that you'll pay them whatever the prime rate is. The IRS looks closely at interest-free loans.

Although this will protect them, you're doing it to protect yourself as well. Suppose your uncle decides to take an expensive vacation and wants his money back? The document should spell out the conditions that require you to return the funds to the lender. Suppose you want to sell your business? If you don't have any record of the loan, a prospective buyer may be scared off by an erroneous belief that there isn't any money in the business.

  • Equity money: Equity money can come in the form of private investments from friends, family, and interested strangers. The interested strangers may be other successful companies that wish to have an interest in your company rather than offering you a franchising opportunity. And, they may bring expertise and industry experience to the table.
  • Home equity loans: If you own your own home, it may be your biggest source of capital to start your new business. Call around for the lowest rates and find out if there are any other hidden costs that you'll have to pay at closing. If you use your home for financing, get a business loan that uses your house as collateral instead of a home equity loan. This may enable you to write off the interest expense as a business expense instead of as a personal itemized deduction on your personal income tax return.
  • Credit card loans: Raising money by using your credit cards should be your last resort because the interest rates are so high. If you find yourself in a position where this is your only choice, reevaluate your new business idea. Take a hard look at the reasons why no one is willing to lend you money. But, if you really believe in yourself and in your idea, go for it. You won't be the first person to finance a successful business by using credit card debt.


A cautionary note on using credit card loans. The annual interest rate is over 18 percent per year on most revolving credit cards. There are many other less expensive ways to borrow money, with lower interest rates, higher credit limits and longer prepayment terms. Examples include a second home mortgage or collateralized loans from banks or private credit companies (e.g., Household Finance).

  • Partnerships: Another means of raising startup money is to bring in a partner. Use caution when taking on a partner because you will have to give up something in return for the money, usually some of the control, profit, and freedom of running your own business. For more information on the ins and outs of setting up a partnership, see partnerships.

Once you're able to raise the 25 to 30 percent you'll need, the next step is to raise the other 70 percent. Although any of the sources just listed can be used to raise this money, you'll most likely turn to one of these sources:

  • Bank loans: Banks are becoming more willing to make small business loans, provided you have some collateral (real estate, equipment, marketable securities etc.) and can convince the banker that your business has strong, reliable cash flow from which to make loan payments. The cost of taking out a small business loan will vary by lending institution. Call around for the best rates and ask your friends and acquaintances for their recommendations. One thing that won't vary much is the documentation expected when you apply for a loan. For a complete discussion of the documentation needed, see debt financing
  • Government loans/guarantees: For a government loan, you still have to go through a bank and submit the required paperwork. Government loans generally require collateral and may charge higher fees, but they may permit you to borrow for a longer term. Ask your banker whether you qualify for an SBA loan. For more information about the types of SBA loans that may be available, see our discussion of federal resources.
  • Local loans: Depending on where you live, you might be able to get a low-interest loan from your state or community. Some communities have what are called venture loans, which are small loans (usually up to $5,000) that you can get without having any equity. The catch is that they're tied to job creation, so you have to be able to show that you'll be creating new jobs. For more information on these local loans, see state and local government loans.
  • Franchisor loans: If your new business is going to be a franchise operation, look to the franchisor as a financing source. A reputable franchisor will often assist the franchisee in obtaining financing for a franchise. In many instances, the franchisor will be the source of the financing or they will refer you to lenders that they have worked with. Lenders are more inclined to provide financing to franchises because they are less risky than businesses started from scratch.
Mike Enright
Operations Manager
small business services

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