Entrepreneurs who are looking to build a thriving business must carefully plan out every detail, from manufacturing costs to marketing and payroll expenses. While making that leap from idea to an actual business is indeed the most important part of entrepreneurship, blindly and hastily jumping into it can lead to a riskier venture right from the get-go. Here is a closer look at how much it costs to start a business.
If you’re building a business that requires a physical location, such as an office space or a manufacturing facility, you’ll have to rent or lease commercial space. In the U.S., the cost of commercial real estate is determined by the rent-to-revenue ratio. This is calculated by dividing the rent cost by the projected or actual revenue. A financially healthy business will have a rent-to-revenue ratio of 2 to 20 percent. The ideal percentage range also varies based on the type of business being examined, with a retail business having a lower RR ratio than a service business.
If your business sells physical products, you’ll also have to account for inventory and raw materials. According to Lantern Credit by SoFi, every enterprise that produces physical consumer goods require some set of machinery and supplies to operate. These include office supplies, like copier machines and envelopes, to heavy-duty machines, such as conveyer belts and commercial refrigerators. Lantern by SoFi suggests leasing big-ticket equipment rather than buying them outright, to distribute how much it costs to start a business and the corresponding risk over time.
There are incorporation fees involved to officially start a business. While this expense category is typically lower than most other categories, it’s definitely something any capital-restricted entrepreneur should know. If you incorporate your business or form an LLC, you will have to file articles of either incorporation or organization. Depending on which state you file in, the incorporation fee can range from anywhere between $50 to $750. There will be a state or federal license fee even if you do not incorporate it. You might want to consider taking out a line of credit to cover these expenses if you cannot afford to cover them all in your budget.
The cost of marketing is usually flexible and will depend on how much capital an entrepreneur has access to. Greater financial backing from investors means you have more marketing channels you can tap into in order to get exposure for your new business and brand. Marketing costs can also vary based on the type of business. Some eCommerce stores, for instance, can get away with minimal to no marketing costs and can survive on the free traffic they get from viral videos they post on social media.
In this day and age, whether you’re a retail brick-and-mortar store or an online store, it pays to have a business website. The cost of creating and maintaining a website is roughly $40 per month, depending on what hosting service and CMS platform you choose to go with.
Behind every successful business is the ability to foresee expenses and allocate available capital for maximum growth. Not knowing how much you’ll need to start a business will make it difficult to make the best possible decisions for your company. Follow the aforementioned tips to get a good estimate of your business costs.