I’m convinced that every aspiring entrepreneur has spent a lot of time thinking about the costs of starting any online business. It sounds like the best-case scenario: you launch a project with ease thanks to well-calculated upfront expenses and a clever budget, and you quickly turn it into a profitable business. To be honest, this is easier said than done. I think that most types of online small businesses require careful planning because of the different costs they involve. Lowering them, or at least having them in mind, is a pivotal moment for the future of the online business project, whatever industry or niche it may be part of.
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Written by Martin Nikolaev: Point of Sale Expert
Overview: Online Small Business Startup Expenses
There are almost always costs to consider, which is what today’s article is about. Because determining all the startup costs could be challenging and stressful, I took this burden off your shoulders and highlighted them as follows:
How to determine and calculate the startup cost of your small business
- A step-by-step process of identifying the costs you’d be facing
- The way to calculate how much money will you need for your big launch
- The importance of determining all startup costs
- How important it is to factor your time when calculating upfront costs
- Use for your carefully calculated budget
What are the expenses to consider and include in your budget
- A list of the typical upfront cost you could expect (estimated)
- Reasons to choose an online business over a traditional one (money-wise and other advantages)
- Suggestions to lower the average costs of starting and running an online business
Even if you choose to start a small online business that requires more startup costs than average, you’d still need to minimize them. A full-fledged online retail operation, for example, could easily consume upward of $40,000 before the end of the first year. The lower the initial investment, the quicker you’ll see the results you strive for. Besides, there are other types of online small businesses that you can get involved with even if you don’t have savings to invest in the project, or you don’t want to go into debt. This is what we’ll discuss in this guide.
How to Identify and Calculate the Online Business Startup Cost You Should Consider
To calculate small business startup costs, you need to identify them first. There are usually more of them than you could expect, so taking your time with this task and not missing a single expense when making calculations is a must.
Everyone can do it. I suggest doing this:
- Write down all the expenses you’ll need to deal with: both the one-time launch costs and the recurring ones you’ll have to cover weekly or monthly.
- Create a blueprint of your business journey: this is how you’ll know what kind of turnover you could expect and when. Doing this will also give you an idea of whether you will cover the projected costs. Even if the math adds up, you can still increase your profit by thinning the costs.
- Always be ready to cover six months’ worth of expenses when you’re starting out. The expected profits from the first months of running your new business might not come your way. To persevere, you’ll be forced to reach down in your pocket and pay the bills. There’s often no other way, and this is another huge reason why the small business startup costs you’re considering should be lowered as much as possible.
All the above sounds intimidating, I understand that. But it’s a process you must go through, plus, it’s not that hard. It takes planning, careful calculations, profit estimates, research of additional financing options, and nothing more.
Here’s a side note: both startup and recurring costs may vary when it comes to online businesses. Land-based businesses consume a lot more upfront and running costs, which is a good enough reason to think about starting an online business instead. You can often start a new online business with no upfront expenses and with almost no money in the bank.
How Much Money Will You Need To Cover Your Online Business Startup Expenses?
Being able to identify the exact amount of online business startup expenses you’ll be faced with is one of the important steps toward designing a meticulous business plan, and you’ll need the latter if you want to secure funding via private investors, loans, grants, or whatever way you’re considering. Still, it takes a lot of research and comparisons to create a precise calculation. Here’s how to do it:
- Consider all the predefined costs first: fees for obtaining licenses or permits, monthly internet payments, hosting plans, and others. You’ll be able to calculate a lot of your upfront expenses with precision by doing this.
- For the costs that you don’t have well-defined values of, you’ll need to estimate average expenses (rent, for example).
- Get in touch with people who are already doing what you intend to do (there are plenty of groups and communities online) and ask them about their monthly expenses. This will give you a clue of what to really expect.
- Calculate every expense related to launching your online business (keep in mind that some of the monthly recurring costs could be part of the upfront ones as well – rent, for example, requires a deposit that’s paid in advance).
By doing all this, you’ll know what part of your budget you should set aside for launching your operation, which will allow you to plan to invest the rest of the budget with confidence.
Online Small Business Startup Expenses List: The Typical Costs to Note
Here’s a list of the typical one-time and recurring costs related to launching an online business:
- Rent (for a seat at a co-working space or a small office if you need one)
- Equipment (computers, mobile devices, printers, furniture, storage shelves, and other items)
- Supplies (depends on the type of business you choose to run)
- Utilities (electric and water bills, internet connection, other maintenance costs)
- Software products (almost every online business needs specific and/or licensed software to operate, and this could be expensive in some cases)
- Legal advice and fees (founding an LLC or other type of legal entity, creating a customer care policy, terms & conditions, and so forth)
- Business Insurance (you can insure both your physical assets and intellectual property)
- Web hosting and domain fees (these costs are usually low, but they are recurring, so you need to not forget about them)
- Creating a website (or another online platform, and/or running social media channels)
- Maintaining inventory (depends on the type of business you’re planning for)
- Marketing (research, campaigns, ads, PPC advertising, affiliate, branding, logo design, and so forth)
- Employee expenses (in case you need extra help when starting out)
- Documentation (permits, licenses, courses, and similar costs)
- Payment processing (you’re probably going to need a POS system and a payment processor, both of which require upfront costs and monthly fees, at least in most cases)
- Content creation (regardless of the niche you chose to join, you’ll need various forms of content, such as web content, social media posts, product descriptions, etc.)
- Social media management (building a strong online presence requires regular posting on social media, as well as customer management/direct response actions)
- Taxes (it’s inevitable to pay taxes for your business activity)
- Shipping and delivery costs (on some occasions, the dispatch and final delivery might be on your account)
- Logistics and storage (depending on your business, you might be forced to maintain the products you’re selling in stock, which is related to a lot of costs)
- eCommerce fees (using most eCommerce platforms will cost you either a commission of each sale or a subscription fee)
I need to highlight that not all the suggestions above would apply to your particular online business. It all depends on several factors, but there’s a good chance that you’ll need to consider most of these expenses.
Factoring Your Time Into Your Online Startup Business Expenses
While trying to trim your budget by lowering the startup costs, you can easily lose track of time. Some people spend too much time trying to cut costs or eliminate them at all in an attempt to avoid going into debt, but this can turn into a huge mistake.
Remember that old saying that time is money? It may sound like a cliché, but only because it’s true. Wasting too much time trying to lower the initial investment needed for your online business as much as possible could not only delay the launch, but it could also make you ditch the idea in fear that you might not be able to make it. The bottom line is, you need to factor your time and only tweak your budget as much as it needs to, without dwelling deeper on the matter.
Also, don’t forget to add a time frame to your research, budget, and launch phases. You need to have enough money in the bank to live until these phases are completed, as well as for at least six months after the launch (similar to the advice I gave you earlier in this guide about the recurring expenses related to running the business.
Why It’s Important to Calculate Your Startup Costs and to Keep Them Low
Identifying the list of possible expenses is your starting point, and the few simple steps I suggested above should help you do it. From the moment you do this, you must precisely estimate their value based on the niche you choose, the scale of business you aim for, and other specific factors.
Let me mention another important reason why you need to have the calculations part covered: it will serve as a stepping stone to finding investors or another type of funding if you need it. Being able to describe all the expenses and explain why and what you need the money for will land you the funds to make your online small business project happen.
Some investors neglect the importance of lowering expenses from the get-go and choosing to start small. Their excitement and desire to have everything they need from ground zero could be devastating for their businesses. If you think you could reduce some costs or eliminate others and still make it possible to launch, then you’re right.
Using Your Online Business Startup Cost Calculations
Once you’re certain you’ve calculated every last expense and you’re ready to create a budget, you need to estimate the expected cash flow and respectively your profit. This is a must if you want to secure the financing you need for your business to take off.
Without doing the math, you’ll not be able to determine your projected income. And if you’re not able to do the latter step, then you’ll have trouble finding someone who’s willing to invest in you. Based on your estimates, you’ll probably have several financing options to choose from, and you’ll need to choose wisely. Here’s what to consider:
- Borrowing amount
- Interest rates
- Collateral requirements
- Payment methods and terms
- Lender’s reputation
If you’ve done precise calculations and you have sufficient projected income, then you’re likely to secure financing much easier and pay lower interest, too.
Creating a Budget for Your Online Business: Tips and Must-Dos
The best type of budget you can create is one that has no startup costs at all, but even in such cases, there are some expenses involved. To design the best possible budget, you need to:
- Analyze and rework all upfront and recurring costs you know you’re likely to face (but don’t thin them down constantly before launching, as you might get lost while doing so)
- Always have an updated estimate of your revenue and your profit margins, because there’s no other way of predicting your profit
- Consider every specific relates to your business that might cause fluctuations in your cash flow, such as seasonal events
- Create spending habits and stick to them (essential for not exceeding your budget)
- Stick to your preliminary set expenses (don’t pay for anything more than your business needs at any early stage of its development, especially if you didn’t plan for an upgrade of a certain aspect)
One of the best ways to make sure you won’t need a lot of startup capital is to pick a niche that won’t require it, such as dropshipping or online translations, no name a few. The best thing about starting an online business is that there are plenty of options that require little to no upfront capital.
Average Business Startup Costs and How to Lower Them
Based on the list above, I tried to describe the costs you’d be looking at. Some of these will not be applicable to your plan, of course, but it’s good to be prepared in case you want to rework your idea or expand your operation. Let’s look at the typical costs to consider when starting an online small business.
If you become a dropshipper, you’d probably be able to launch your business from home, meaning that you won’t need to pay for an office, but some online businesses either need to pay for a coworking space or to rent their own office space. If you need employees or you must set up a server room, for example, then you would most probably be faced with paying rent, which is a recurring expense, obviously. Sometimes, an underground room with ventilation is enough, but in other cases, you’d need a presentable office space with easy access, and the latter would cost you a lot more.
This will cost you anywhere between $100 and $2,500 per month (not including deposit), depending on the area you live in and the type of location.
How to reduce your cost:
One way to avoid larger upfront expenses is to use the space you have available. You can always follow Jeff Bezos’ example and start your journey from a garage to avoid paying rent. He started small, and look at him now! Being able to find another entrepreneur and share the rent and utility costs is a great alternative that will save you 50% of these funds, so you can redirect them to other aspects of your budget.
If you choose to start a small online arts & crafts store or something more exotic, such as an online thrift store, then you’d need to make room for inventory, literally speaking. You’ll need enough inventory or supplies to create it, meaning that you should be able to organize the whole delivery process and estimate the quantity you’d need per week or per month.
Dropshipping automation software is a great way to cut costs. Third-party suppliers can provide you with software solutions related to outsourcing fulfillment and inventory tasks. All processes that have to do with these tasks are carried out via computer software. This technology speeds up the process and creates a seamless workflow that you won’t have to worry about.
By choosing dropship automation software, you’ll avoid having to execute a lot of tedious actions personally, such as order approval, packing, and sending. Other perks of this solution include:
– Better-than-ever efficiency
– Faster ordering and shipping processes
– Improved accuracy
– Lower operational costs
– Proven reliability
– Additional features
Inventory Source can bring you the dropship automation software of your dreams. Its solutions related to inventory and order management come alongside catalog management solutions and a plethora of supplier integrations. By using Inventory Source’s solutions, you won’t have to take care of product data integration and updates related to the data flow between your suppliers and your online store. Plus, Inventory Source lives up to its name by providing you with hundreds of dropship suppliers.
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Another way to lower expenses related to inventory management, accounting, and supplier management is to opt for a reliable small-business accounting software such as FreshBooks.
Using such a solution has loads of perks:
– Smoother small business management process
– Large volume of invoices can be generated and sent at once
– It’s easy to follow up on payments, which results in greater performance
– Better-than-ever cash flow: the optimized invoicing process leads to better revenue
– Improved efficiency and accuracy
– Impressive presentation: By using specialized invoicing, you will be able to create professionally formatted invoices, which always makes a difference
On average, this expense will consume between 15% and 25% of your budget.
How to reduce your cost:
The tedious part about organizing your budget is knowing how much to order for everything you’d need. Overstocking would equal too many expenses, and the low stock would cause an inability to fulfill orders. Both are huge no-nos. To reduce inventory costs, think about renting a place that combines your storage and office needs (if you must have an office for your employees).
No online business could ever go by without a single piece of equipment. I know people who are able to run everything from their smartphones or tablets, but that’s not the common case. Usually, most online small businesses require at least one computer and a plethora of peripherals or other gadgets, not to mention the additional software that might be part of the equation as well, depending on your needs. If you need an office, think about new pieces of furniture, branding, and everything else you might need. If you’re going to sell things online, don’t forget to research and find the most appropriate POS system for your needs. PayPal Zettle is a great example of a feature-rich POS solution capable of accepting online payments.
The average cost of the equipment you’ll need can vary a lot. It might be just a $750 laptop, but you could also spend a 5-figure amount of money to have the setup you need.
How to reduce your cost:
Even if you need the whole package, you can always find good deals and substitute whatever you can with used units to save money. That’s a good way to cut costs by a substantial amount, and you can always upgrade to new alternatives once the cogs of your operation turn and you’re making the profit you planned initially.
4. Legal fees and taxes
Founding a company of any sort is impossible without legally registering it. This means that you’ll owe incorporation fees that depend on the state you’re in, and the type of company you want to run (most small businesses start as LLCs or legal liability companies).
You might also need specific permits to operate, which means you’ll have to pay extra fees for filling out documents and receiving a license, a certificate, or a permit. It’s best to hire a consultant to help you with all legal matters and taxes, but that will cost you additionally.
To make sure you allow no mistakes and enjoy a smooth start, you might as well hire someone to handle everything related to launching documentation to a professional. Northwest Registered Agent is the business formation service provider to choose if you want help with legally establishing your business. You can count on immaculate customer support and sublime service delivery.
By choosing the paid subscription plan Northwest Registered Agent offers, you can have access to numerous services, not to mention the advantages related to using them. You can easily register an LLC, but you can also opt for EIN filing, mail forwarding, numerous certificates, corporate services, virtual office and/or phone, and a lot more. This registered agent offers transparent fees and an excellent pricing model.
The incorporation fees are usually around or less than $300, but can reach double that amount. When it comes to paying taxes, you’re looking at a flat corporate income tax of 21%, but there might be other deductions as well, based on your trade and the state where the company is registered.
How to reduce your cost:
If you want to keep this type of cost to the bare minimum, then you should read all about how to register a company yourself and follow the relevant authorities’ instructions.
Having a marketing strategy as part of your initial blueprint is crucial. Even if you offer the best products, services, and prices, nobody would work with you if they don’t know you exist. A proper marketing campaign would certainly change that. But it’s not all about advertising.
Your marketing plan should include branding. While some online small businesses do not require a strong brand (your name would be enough for people to recognize you in these cases), the majority of them do. Having an attractive logo and a catchy, easy-to-remember brand name is very important. You’d be better off leaving this to the professionals, but only if your budget allows it.
In some cases, you might need physical marketing attributes, such as business cards and banners, for example. But the most effective part of your marketing endeavor is always advertising. The power of social media marketing is unprecedented: this is how you could reach and interact with a wider audience than ever before, and build your brand authority the right way. Finding the right consultant or agent to design your personal campaign and target it properly will boost your performance like nothing else. If you can do it yourself and it’s effective, it would only cost you as much as the sponsored posts online are worth. But hiring an online marketer is not steep as well, and it could increase your sales more than enough to cover such an expense.
There’s a great (and cost-effective) alternative: using a digital media software product. Wondershare is a prime example of this. The popular software development entity provides a suite of digital media business solutions and offers several perks you can take advantage of when executing your marketing strategy. Its innovative products and tools, such as Wondershare Studio, Uniconverter, Filmora, and the DemoCreator, can help you unleash your digital creativity and create stunning content for your marketing strategy.
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You could do it yourself for free (not factoring your time and the money for paid advertising). Your marketing costs could be non-existent, but they could take about 10% of your initial budget.
How to reduce your cost:
Getting an online course to learn how to do it yourself can save you money as opposed to hiring a specialist, but it may cost too much time before reaching the point where your ads will generate leads and revenue.
Building a website sounds expensive, but we already live in the future, so that’s not necessarily true. There are quality website builders you could choose if you want to create a website or an eCommerce store. Wix, for example, will allow you to create an online store for as little as $20 per month, which is the basic price, but it could be enough for you in terms of functionalities included. Squarespace is another awesome alternative that you could use to have an eCommerce-ready website in no time, alongside a myriad of additional tools, such as SEO modules and even a logo creator, thus saving you money for part of your marketing activities.
Sometimes, website builders would not be enough to create the final product you need, but there are plenty of marketing and web design studios that would gladly take your money to build you a custom website or an online store.
You can use a free website generator to create a website or hire a professional for at least $80 per hour.
How to reduce your cost:
There are plenty of tutorials on how to build a website from scratch. Using WordPress is an easy way to do it with little assistance, but you’d still need to learn the basics, not to mention that the final result could be a sloppy job.
This is an inevitable part of the recurring costs of any business, regardless of its scale or niche. Of course, if you’re starting small, the utilities you’d pay for every month would hardly be any different compared to the money you already pay. Launching a small online business from home is the best way to avoid high monthly bills, but it’s not applicable to all low startup cost business ideas.
The place you rent (an office, a storage area, or whatever type of property you need) could vary a lot when it comes to monthly expenses, depending on the state you’re located in and the specific consumption of utilities your business would require.
You’re looking at above $3 per square foot for all utilities combined per month.
How to reduce your cost:
As I suggested earlier, sharing a space with someone else can drastically reduce these costs. The best way to cut them is to operate from home if you have the chance.
Payroll is a huge expense for almost every business, but it doesn’t have to be the same for you, especially when you’re starting out. Not everyone could carry all the load when they’re building a new business. If you could do it, then you’re lucky. Chances are, however, that you might need someone to help you.
If you must hire employees, then be prepared to spend up to half of your entire budget on paycheck (net), paid leave, overtime, bonuses, and so forth. On the upside, having the right employees will help your business grow faster.
The employee salaries depend on the local legislation and the mutual agreement you reach with them.
How to reduce your cost:
This would be the moment to weigh if you need an employee, even if you hire them part-time, or you could go for an outsourcing deal instead. There are plenty of companies you could use to outsource several tasks and focus on the development of your new business instead of dealing with these tasks. For example, you can count on Zendesk for all your customer support and CRM needs.
Hiring consultants is something most successful business owners do. They provide value by sharing valuable insights, advice, and guidance. If you’re tempted to enter a niche you’ve never been part of before, then consider hiring a professional consultant. They could save you a lot of time and resources, making their fee an investment in the bright future of your business.
There are dozens of aspects related to running your business that could benefit from appointing a professional consultant: legal matters, taxes, accounting, administrative issues, and so forth.
Accounting services vary when it comes to rates, but you’re looking at anywhere between $60 and $400 per hour.
How to reduce your cost:
Part of these tasks could be automated thanks to the right software, such as the Sage 50cloud accounting solution. This, of course, is a different type of expense that I mentioned earlier.
Having insurance is an absolute must. Even if you are a dropshipper working from your sofa at home, consider insuring yourself and your laptop. If you can have this type of protection, then go for it, regardless of how small you’re starting out.
The bigger the scale, the bigger the insurance costs. If you have goods or supplies in stock and you’ve appointed employees, you need to insure them as well. Don’t forget about insuring your home (if that’s where you’re working from), all your business assets, and your intellectual property. In the world of online business, the latter matters a lot.
This would cost you as much as $5,000 per year, sometimes even more.
How to reduce your cost:
Business insurance costs can be steep. The only way to reduce them is to compare offers and possibly get a package deal.
The Most Affordable Way to Start a Small Online Business
Even if you’re looking at a substantial upfront investment to start an online business, there’s still a lot to be done if you want to play it safe and reduce the startup costs.
- Try to mitigate part of the expenses: to achieve that, you can search for alternative solutions to some of the aspects of your upfront costs, but don’t go for the cheapest solutions, as this might backfire in your face and result in additional costs instead of saving you part of your investment. You can see what your competitors are doing or research how they started. This could inspire you to apply changes to your initial plan and save money.
- Be reasonable when planning: I already mentioned that you need to have a rational approach when creating a business plan and a budget. Even if you could afford an alternative to some aspects of starting out, stick to what’s enough to get the job done. Going for unnecessary spending would cause an excessive budget.
- You should plan on generating revenue as soon as possible: To avoid spending too much money from your capital when trying to sustain your business after the launch, you’d be better off enjoying revenue at an early stage of your business’ development. This is not possible with all online businesses and depends on your industry, of course.
- Try to find investors instead of getting a loan: If you’re certain that you have a good idea and you have the means to prove it (a detailed business plan and a carefully planned budget would be tools for this job), then you can find an investor or an associate and split the bill with them when starting out (and the profit, too, but it might be well worth it if you manage to launch your online business using this strategy instead of not being able to do it at all on your own).
Why Choose an Online Business Over a Brick-and-Mortar One?
There are plenty of advantages related to launching an online business compared to starting a land-based one. I mentioned part of them in the article above, but I feel like I should summarize them:
- Significantly fewer upfront expenses (in most cases, at least)
- Much lower overhead (this depends on the niche, but it’s mostly valid)
- Easier or no inventory management (some online businesses require zero logistics or inventory keeping, while most brick-and-mortar operations cannot exist without goods or supplies in stock)
- Faster launch (unlike physical retail and service-based companies, online businesses can be set up faster and with less effort. Depending on the industry, you could launch an online business you have no previous experience within just a few weeks)
Hopefully, this article will help you identify, calculate, and lower the startup and recurring costs related to launching and running your new online business, which is usually way easier compared to land-based or service-based projects.
Regardless of the business you decide to start, you should always strive to keep costs low, even if you have an enviable budget to spend. Until the project kicks off, you need to be sure you’ll be able to cover all running costs without issues. This is how you will persevere.
- Launching an online business requires planning
- Being able to identify all relevant online business startup costs is a must
- Take your time when planning startup and recurring costs and performing calculations, as they will be the basis of your solid blueprint, as well as the instrument you’ll use to secure financing
- Once you’ve done your research and you know the expenses you’ll face, you need to prepare a detailed business plan and a well-crafted budget
- It’s important to start small and be conservative when planning your upfront and recurring expenses
- Always choose a business with lower startup costs, because you’re likely to profit from it much faster
- Try to keep costs lost, but don’t waste too much time trying to eliminate them completely
- Strive to achieve profit as soon as possible to avoid spending your capital for sustaining your business
Online Business Startup Costs: FAQ
Which is the cheapest business to start?
Among the dozens of low startup cost business ideas, there are a few that stand out as the cheapest ones possible: virtual assistant services, event planning, content writing, online reviewer/editor, social media marketing, eCommerce sales, and online mentoring.
What business can I start with $5,000?
$5,000 is a hefty budget to start a business with. With such a budget or less, you can become an app developer, a business consultant, a blogger, a podcast host, or an event planner, to name a few options.
What business can I start fast?
Some of the businesses you can start in no time include SEO services, small business consultancy services, social media marketing, dropshipping, blogging, affiliate marketing, and web design.
How do I find startup ideas?
Sometimes, finding the best online business idea doesn’t happen overnight. To find the best one, you need to recognize your strengths and use your existing knowledge. Combining it with passion and research, the idea will come to you. As an alternative, you can always see someone successful and try to follow their path through your own prism.
How much capital do I need to start a small online business?
The upfront capital you need to have depends on the niche you pick. You might be able to launch a dropshipping business with just a few hundred dollars, but you might need thousands if you want to sell fine jewelry through an eCommerce store, for example.
What is the startup cost for an online business?
The startup costs you will need to cover also depend on the niche and format of your online business. You might be able to launch your operation while avoiding big expenses such as office rent or salaries, but you might be forced to pay for expensive software, office, warehouse, and other assets.
What are startup costs for a business online?
The startup costs for an online business include:
- Office rent
- Employee salaries
- Licenses and permits