How Much Money Is Needed to Start a Business?

How Much Money Is Needed to Start a Business?

Many people think how nice it would be to have their own business. The first step is to determine how much money it takes to get the business off the ground.  The amount you will need varies greatly depending on the nature of the business.

When analyzing how much much you need it is important to consider both the start up costs and the ongoing costs:

  1. The amount you need to open your doors is called "startup capital" - basically everything that needs to be in place to serve your first customer.
  2. The amount you need month to month falls under cash flow management. There will be ongoing expenses, but also ongoing and hopefully growing revenue.  Keep in mind if you run out of cash your are effectively out of business.  So you always need a little padding in this area if things do not go as planned.

7 Expenses to Consider When Starting a Business

1) Real estate and utilities

If you want to open a store, a major factor in your budget is renting or buying real estate.

If you are going to rent your location, you need to sign a lease agreement. Out of the gate you will need to come up with any deposits, first month, last month, etc.

If you want to buy commercial real estate, you need to come up with a down payment and closing costs which can range anywhere from 10% to 30%, depending on the lender.

In either case you will also need to pay for modifications to the location to suit your needs, signage, decor, etc.

In addition to your monthly lease or loan payment, utilities should also be paid monthly. In 2019, the average monthly cost of utilities for commercial real estate in the United States was $647.61.

2) Equipment and consumables

The most important equipment for the store are shelves and displays for merchandise. In addition, you need to get a counter and cash register for checkout. Investing in a point of sale system, merchant account for credit card processing goes along with this. You will also need to think about janitorial supplies, any day to day items that need to be kept in stock, etc.

3) Licenses and permits

Every company should have licenses and work permits. These licenses can be at the state, county and municipal levels. In this case, stores should have permission to sell certain goods so that they do not have problems with inspection.

4) Insurance

Business owners need to purchase general liability insurance, which protects against third party injuries and claims. The price of the policy varies depending on how risky a particular industry is. For example if someone trips inside your store has to go to the hospital, the liability insurance would cover this.

5) Inventory

Since stores sell at retail, they need to purchase everything they plan to sell in advance. They also need to have orders place to consistently replenish their inventory based on the rate they are selling at.

A rule of thumb you may see is that small businesses should expect to spend between 17% and 25% of their budgets on inventory, though they may need to spend a bit more when they’re first starting up.

6) Website and technology

At a bare minimum you will need a website and social media profiles so customers can find out more about your business.

At least one computer or laptop will be needed to track everything that is going on with the business, including accounting software and anything specific to your industry. You may also need to invest in a security system, wifi / networking, bar code scanners, etc.

7) Advertising and marketing

If you want to promote your products, you can do it with the help of social networks or in the old-fashioned way with the help of flyers, and if you do not know how to do marketing on social networks, you can hire a marketing agency that will do it professionally.

Calculating How Much It Costs to Start a Business

To calculate how much it will cost you to start a business it is best to make a business plan. This will outline your initial startup cost, ongoing monthly costs, and revenue (the fun part).

  • One-time costs relate to the purchase of equipment, licenses and permits.
  • Ongoing costs are paid monthly or periodically (for example, annual license fee) represent current expenses.
  • You can further divide ongoing costs into fixed and variable costs.
    • Fixed costs are the same every month (such as rent),
    • Variable costs change from month to month (such as utilities).


Sample Small Business Startup Budget

To have an idea of how much it costs to start a small business, I will use the example of opening a small cafe. The tables below shows one-time and monthly costs:

One-Time Costs:


Security deposit and first month’s rent


Utility deposits



Coffee prep and brewing equipment


Cups, mugs, dishes, bowls, utensils


Tables and chairs









Licenses and permits


Legal fees






Monthly Costs


Physical Space











Payroll taxes


Health insurance


Professional Services




Operational inventory


Office supplies




Digital advertisements




Website upkeep



Other expenses






As you can see the cost of opening a smaller cafe is $28,750 when you add up the costs from these two spreadsheets.

The cafe will need to bring in over $15,750 per month to remain viable assuming you do not pay yourself a salary.

When to Consider Small Business Loans

If you don't have enough money saved to start a business then you should consider taking a loan. There are several types of loans with different interest rates and you decide which loan suits you best.

Some of the types of loans are:

Term Business Loans

The bank provides these loans for a certain period. You repay the loans in installments together with the interest. A short-term loan can vary from a few months to as much as 18 months, while long-term loans can range from 3 to 25 years.

For most business owners, short-term loans may be more attractive because they repay faster but have an interest rate of 8% to 13% which is very high, while long-term loans have lower rates but are harder for entrepreneurs to qualify for.

Online Loans

Loans from an online lender are similar to short-term and long-term loans. Unlike traditional banks, online lenders do not have strict requirements. The disadvantage of these loans is that they can be more expensive than loans from traditional banks.

Small Business Administration (SBA) Loans

If you manage to qualify these loans to have competitive interest rates and if it happens that the borrower is unable to repay the loan the federal government undertakes to repay it to the lender. The disadvantage of SBA loans is in the long process of obtaining loans.


Before you open the doors of your very own business the first step is to do a thorough analysis of the costs. This includes the startup costs, the ongoing monthly costs, and the revenue required to sustain the business.

The post How Much Money Is Needed to Start a Business? is part of a series on personal finances and financial literacy published at Wealth Meta. This entry was posted in Financial Literacy
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