2021.3.5

How Much Money Do You Need to Start a Business?

Written by Austin Chegini

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If you have an excellent business idea, you likely want to make it a reality as soon as possible. Also, the faster you act, the less you have to worry about competition or someone else capitalizing on your idea. 

But before you rush to open up shop, how much money do you need to start a business?

Since all businesses have unique demands, there is no definitive answer to this question. Depending on your goals, you might need anywhere from $100 to $100,000 to start your business. 

Startup costs for various business models

Below are rough estimates of how much money you’ll need to start specific businesses. 

  • Brick and mortar retail: $5,000 - $100,000 
  • Full-service restaurant: $100,000 - $750,000
  • Bar: $100,000 - $500,000
  • Online store: $50 - $5,000
  • Mobile service (car detailing, pressure washing, etc): $1,000 - $25,000
  • Home-based business: $100 - $500

Your actual startup cost will vary depending on a wide range of factors. However, you want to make sure this business venture will be worthwhile. Before committing to an expensive lease or signing any purchase orders, be sure to use the Small Business Administration’s break-even point calculator to see how much revenue you need to generate to justify your startup costs. 

Common factors that affect startup costs

For most businesses, the following items will have the largest impact on your initial expenses. 

Rent

The location of your business is extremely important. Not only do you need to be concerned about where you start your business, but you also need to ensure the space accommodates your needs. 

Unfortunately, you will likely pay higher rent for a commercial space that is in a good area and has all the features you need to get started. While you shouldn’t skimp out on crucial aspects, you might need to forgo some elements that could raise rent rates. For example, choosing a location with shared parking can often be cheaper than opting for a building with private parking. 

How much should small business owners pay for real estate? 

The answer is found in your rent-to-revenue ratio. To find this number, divide rent/revenue. A healthy business will get a result between .02 and .2 (or 2% and 20%).

For retail businesses, you want this percentage to be close to 5%. For service businesses like accountants, this ratio can sit higher around 15%. 

Inventory and raw materials

Do you plan to sell goods? If so, you will need to buy your inventory and stock your shelves. 

If you are a restaurant or other hospitality business, you will also need to purchase inventory to create your menu items. 

Depending on the scale of your business, purchasing these items will be a significant investment. For luxury stores that sell high-end fashion or specialty stores that offer expensive equipment, your cost per item will be especially high. By simply outfitting your store, you can quickly spend $100,000. 

In any event, you will need to crunch numbers carefully to decide how much inventory to purchase. Some factors to consider include:

  • Demand: Analyze your market to determine what your expected sales volume will be. 
  • Storage space: While you want to stock your shelves so your store doesn’t look empty, having too much inventory can end up costing you more. Likewise, having perishable items sitting in storage could increase your shrinkage costs. 
  • Liquid capital: Don’t invest all your cash into inventory. Make sure to have extra funds for unexpected expenses.
  • Profit margin: If you have high margins, you can get away with selling fewer items. If you have low profit margins, you will need to sell many items to stay in the black. 

Equipment and supplies

Your business will likely need a range of tools to operate smoothly. For small stores, these items can be quite inexpensive. For large restaurants, this equipment could make up a significant portion of your initial investment. 

Retail businesses may need:

Hospitality businesses may need:

Administrative affairs

Whether you work from home or have a giant store, your business will need to comply with local laws and process many behind-the-scenes tasks. No matter if you handle these administrative items yourself or hire someone to assist you, they will affect your bottom line. 

Make sure to account for the following items in your business plan when calculating your startup costs:

  • Licensing and permits
  • Payroll
  • Taxes
  • Utilities
  • Legal services
  • Office supplies
  • Software

Advertising

The global economy keeps growing, and with it comes increased competition. No matter how good your products or services are, you need to market them to prevent someone else from taking away your customers.  

Advertising costs could vary wildly depending on your business model. For example, a gas station likely doesn’t need to do much more than set up roadside displays. On the other hand, a restaurant located in a shopping plaza might need billboards, TV ads, social media posts, and more. 

Although marketing comes at a cost, it does not have to be considered a loss. With the right approach, you can generate a positive return on ad spend that helps your business grow. 

Where can you get money to start a business?

Taking a business to market takes a ton of sweat equity and discipline. But no matter how hard you work, you will need to save money and find startup funding to grow your business. Also, some entrepreneurs want to focus solely on doing what they love and not worry about finances and seed money. 

If you need funds to get off the ground, you can find resources from the following sources:

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