How Much it Costs to Start a Business and How to Plan
Hey Bow Tie Nation, Joseph Hogue here with the Let’s Talk Money channel and you know I love talking investing. It’s been my profession as an equity analyst and I love the idea of putting my money to work but the fact is that very few people will ever get rich just by investing.
This is a survey by BNP Wealth Management of 2,500 millionaires and where they have their money. I love this survey and one of the most surprising facts is that most millionaires, they’ve got far more invested in their own business than in stocks. In fact, on average, most millionaires have more in bonds and cash than in stocks.
Nation, the rich aren’t rich because they make 8% on their money in stocks. The rich are that way because they’ve created assets that are paying them double- and triple-digit returns on their money. They’ve started a business that creates wealth.
But I understand, that’s a big step. The Small Business Administration reports less than sixty-percent of the small businesses started make it past their third year in business. This graph shows survival rates by number of years in business and it’s a pretty steep curve through the first five years.
But there is a way to take the risk out of those small business statistics. By starting a business that costs less to launch, you can experiment with different ideas until you hit one that takes you to that seven-figure payday.
So in this video, I’ll give you a crash course on how much it costs to start a business. We’ll look at real data from the SBA and all the costs to launch run your business. Then I’ll count down the top five business types and how much it costs to start each. I’ll start with the most expensive then count you down to reveal the easiest business to start, one you can get started with no money at all.
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Average Cost to Start a Business
Nation, according to the SBA, entrepreneurs started their businesses with an average of $10,000 in 2019 with home-based businesses a little cheaper to start between three- to five-grand. Data out of the Kauffman Foundation puts the average quite a bit higher though with around $30,000 to start a traditional business.
And we’ll look at those business types but here remember there are going to be big differences in the startup costs between traditional businesses with a physical location, online business ideas and those service-focused businesses.
Your startup costs are those one-time expenses to get you up and ready to go. These are going to be things like office equipment, supplies, licenses or permits, any market research you need to do to understand things like prices and the cost to put together your website.
The Small Business Administration offers a free worksheet to estimate your startup costs as well as monthly expenses. I’ve downloaded the spreadsheet and will link to it below so you can download it. The worksheet has columns for budgeting as well as actual costs. You can change the amount in each column and even change these rows for costs specific to your business.
What I love about this worksheet is that it’s going to calculate the entire columns here, your budgeted numbers and actual and then give you a grand total at the bottom.
It’s NOT the Startup Costs that Sink a New Business
Ongoing monthly costs are the killer here and you should have at least an estimate for these before you start. The thing is, why so many business owners fail, is because while it might only cost a few grand to get started, it might cost upwards of ten grand a month to run the business.
And no matter how great an idea, your business isn’t going to be earning its full potential right off the bat. It’s going to take time to get up to speed so it’s a good idea to have up to six months’ worth of these on-going expenses in the bank before you start. These are going to include your rent for office or sales space, utilities, any software you need, inventory, salaries and marketing.
Just one more note here before we get to those five business ideas and startup costs on each but understand the difference between fixed and variable costs. Fixed costs are going to be those on-going costs that are a set amount no matter how much you make. These are things like your rent, utilities and insurance.
Then there are the variable costs and they’re called this because the amount varies according to how your business grows. For example, sell more of a product and you’ll need more of the materials that go into making the product. Your marketing costs are also something that rises and falls, and why this is important is because those fixed costs are the bare minimum you’ll need to keep your business running. You’ll want a budget for the variable costs as well but not having enough to cover fixed costs will break your business.
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Top 5 Cheapest Businesses to Start Today
Now I want to countdown through the top five business types and how much it costs to start each. I’ll detail the pros and cons of each as well as how much it costs. And besides the lower cost to startup the last three we’ll talk about, they can each be started from home. The SBA reports that 50% of small businesses start as a home-based business so anyone can do this!
How Much Does it Cost to Start a Franchise?
First on our list is buying into a Franchise, so we’re talking any franchise business from a boutique travel agency to opening a McDonald’s.
A franchise is when you buy the right to use an existing business, the business owner helps you get started with training, marketing and hiring. In exchange, you pay a one-time franchise fee and an on-going percentage of sales.
The SBA reports that about 3% of all businesses are franchises including many of the most popular chains like McDonald’s, Subway and Domino’s.
These things can be super-expensive to start though with that one-time franchise fee ranging from a couple grand to twenty- or thirty-thousand dollars for some of those popular brands. You’ll also pay that percentage of monthly sales to the franchise, so for example McDonald’s corporation takes 4% of your sales off the top each month.
For most franchises, you’ll also have a minimum liquidity and net worth requirements. These big brands want to make sure you have the money set aside to make the business work and aren’t going to let their good name suffer with a bad franchisee.
All told, it’s usually going to cost at least thirty- to fifty-grand to start most franchises including store lease, inventory, fees and training.
Pros here are that you get everything you need to get started and support from corporate in running the business. Most of these have some kind of a training program and they legitimately want you to succeed.
Cons though are those high startup and on-going costs. Besides just the regular costs to run a business, you’ve got that monthly percentage you’ve got to kickback to the franchise and some of these even expect you to buy their supplies, which are always at a higher cost than wholesale.
I’m skeptical of the franchise model because it’s just so easy to go the DIY approach. Even if you’re hesitant to start from scratch, do your research and just learn how the business is run without having to pay the fee or on-going expenses.
How Much Does it Cost to Open a Store?
Next here is opening a traditional retail store and I’m including this one just as a way to compare it against the newer ideas we’ll look at next.
Here we’re talking any traditional brick-and-mortar store whether you’re selling clothes or donuts. You’ve got a physical location either in a mall or stand-alone store.
Startup costs vary but Forbes puts the average anywhere from twenty- to fifty-thousand dollars for these. One of your biggest expenses is going to be the commercial space which can run between $3 to $5 per square foot each month and remember, you need the space you see as a customer and the backroom space to store your inventory and supplies.
You’ll also need to pay staff because you’ll want the store open at least from 10am to 9pm. You might be able to take care of the bookkeeping yourself at home but you’ll need at least two full-time employees for the store which will cost at least four grand a month.
And you’ve still got inventory costs and all the other fixed costs that go into a business. All told, including a budget for the first couple of months, that twenty- or thirty-thousand estimate is probably an absolute minimum you should start with for a traditional retail business.
How Much Does it Cost to Start Amazon FBA Business?
Third on our list, an Amazon FBA business, and I love this as an alternative to that traditional retail business.
Fulfilled by Amazon, or FBA is the 21st century way to create your own retail brand. You contact with manufacturers through a site like Alibaba to design your product and package it with your logo. The manufacturer then ships directly to Amazon’s warehouses. You have your Amazon page and the product is shipped directly to your customers.
You don’t have the retail store costs, you don’t have to hire a bunch of staff. For a per unit fee based on the product size, Amazon stores and ships your sales.
I’ve seen people start an Amazon FBA business for as little as a couple of grand. Your startup costs are enough for an initial inventory, so ordering that first bulk shipment from your manufacturer. You’ll want your own website to draw visitors from Google and social media before redirecting them to your Amazon page but that costs less than $3 a month.
You might spend a few hundred dollars in Amazon marketing ads to launch your product but get your website traffic going and the organic sales you can be enough to keep your products ranked and getting sales from Amazon visitors.
Pros of an Amazon FBA business is that so much of the system is already set up for you. Alibaba lists thousands of manufacturers for hundreds of thousands of products. You can get something custom-made, have it shipped with your logo and packaging and sent to Amazon’s warehouse. You’ve got a sales page on the world’s largest ecommerce site and it takes care of the logistics.
The downside to this compared to that traditional retail business is maybe your product page isn’t as visible as a big store on Main Street. You have to get those first sales to your page before Amazon starts ranking it and sending you traffic.
Most of your startup costs here are going to be your time, developing the idea and managing your website. You’ll get a good idea of how fast your inventory sells and it won’t take long to place a new order ever month or so with the manufacturer.
One of the best things you can do here is build up that traffic to your website to send visitors to your Amazon page. I’ve seen people spend thousands in Amazon ads each month when they could get the same effect for free if they’d just start a blog for that traffic.
How Much Does it Cost to Start an eCommerce Site?
Next here is creating an eCommerce site and here we’re getting into the business ideas with the lowest startup costs.
This works with either that own products model so using it with your Amazon FBA page or as an affiliate model for no costs at all. So an affiliate website is going to be a blog you update at least once a week, basically just posting articles related to a topic.
Within each of these articles, you mention products or books that go farther to solve a problem. So maybe you list out five ways to get in shape and throughout the list, you mention exercise equipment or courses.
You can sign up to be an affiliate of these products or courses either directly with the business or on an affiliate network like CJ Affiliates or Share-a-Sale. When you sign up to promote these products, you’ll get a special link to use in your posts. If someone clicks on the link and makes a purchase, you get a commission.
Advantages of this kind of business model are you don’t have to take the time to create your own product or course. You’re promoting someone else’s products so you can just look for the best one out there. You don’t have any of those product costs and you can have everything up and running in an afternoon. Best of all, besides maybe $3 a month to host your website, there are absolutely no costs here expect your time.
Downside here is the profits are going to be lower until you get your website traffic up to speed. You can make between $25 to $150 for each sale on a lot of these affiliates but you’ll need blog visitors to do that. That means time spent writing posts and getting traffic from social or search.
How Much Does it Cost to Start Making Money Online?
Number one here for the business idea with the lowest startup cost is becoming an online influencer.
It costs nothing to start a social media account or a channel here on YouTube. Yeah, you can spend thousands on a fancy camera but take a look at the first videos on most channels, most people start with nothing more than a basic smartphone.
I’ve made just over $100,000 in the last 23 months and have averaged over $7,700 a month this year. That’s just on the ads YouTube shows before videos, not including sponsorships or affiliate sales.
I’ve got a couple of videos on starting a YouTube channel as well as a free webinar for growing your channel and making as much as possible.
Pros of starting your YouTube or social media business are that it costs nothing to start. You don’t even need a website though it’s a good idea. You’ll build a community around your videos and will start making money automatically once you reach a 1,000 subscribers.
Cons are that there is a lot of competition right now on social media so you’ll need to narrow your topic. You can’t just talk about everything under the sun so choose something you can be an expert in.
It costs less than you think to start a business and you can start making money online for nothing at all. Understand what business you want to start, how it works and plan for the costs ahead of time and you’ll be on your way to success!