How Much Does It Cost to Open a Small Business?
Starting a business can be a daunting task. With licensing headaches, tax information, and other red tape to break through before the first inventory is even purchased, many entrepreneurs jump into business without a firm understanding of the financial--and other--costs associated with opening a business. This article explores some of the common start-up costs associated with a business, as well as some considerations to keep in mind when jumping into the business realm.
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Business License
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After a great idea and a solid business plan, one of the first considerations before opening a business is to acquire the proper licensing. Business licenses are normally issued by any applicable municipalities including state, county, and local city, town, or community government. While business license fees vary from location to location, business owners should expect to put aside about $100 per necessary license, including the local county and city licenses. Entrepreneurs who want to open a specialty business--like a bar, salon, or gun store, for example--will also want to set aside additional funds for specialty licenses (in the city of Orlando, Florida, a liquor license alone can cost around $1,000).
Sales and Use Tax Registration
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In addition to the required business licenses, it is also necessary to register a business with the appropriate state agencies for reporting and collection of sales tax. Some states, like Tennessee, automatically register new businesses with the state tax agency when the business license is issued. Other states, like Florida, require an additional registration steps. In most states, the up front fee to register a business for tax collection is nominal (under $50), though the agency will later collect a percentage of all sales processed.
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Office, Retail, or Warehouse Space
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One of the largest financial considerations for new businesses is the real estate investment necessary to house the business operations. The cost for a lease or purchase of space varies by the business type (a warehouse operation would require more room and incur higher costs than, say, a video store); in addition, lease expenses fluctuate dramatically from city to city and even neighborhood to neighborhood. The type of business may help determine real estate needs (a telemarketing or warehousing operation may be able to find cheap rent in an industrial park, while retail establishments require more expensive locations with high visibility), though business owners should carefully consider business needs before making any real estate commitments. Much like a residential lease, businesses are often required to pay the first and last month of lease payments in addition to a security deposit before moving in.
Business Equipment
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With a location selected, business equipment can be purchased and moved in. Much like the real estate requirements, the business equipment is largely necessitated by the type of business endeavor. A retail store, for example, would require purchase of display cases, racks, and paraphenalia as well as cash register(s), credit card terminal(s), computer equipment (for accounting and operational purposes), surveillance and security equipment, telephone equipment, and signage for the outside of the store. With some bargain shopping and selective purchasing, these expenses can come in under $5,000, though a more typical price tag may be two to three times that amount. Telemarketing operations, by comparison, require a significant investment in telecommunication equipment that often costs more than $10,000 alone; that expense is compounded by the need for cubicle space, computers, ergonomic chairs, note pads, pens, and other supplies. Many small business owners, depending on their business type, invest as much as $30,000 to $50,000 in necessary start-up equipment.
Inventory
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While some small businesses like advertising agencies, telemarketing firms, and warehouses do not require any specific investment in inventory, retail operations build their business around it. Retail stores, after all, revolve around promoting and selling their inventory, and these items can accumulate a considerable expense. Again, however, the expense is largely dependent on the type of establishment being opened. A retail store selling small, tourist-oriented trinkets can be stocked at a substantially lower price than, for example, an electronics store. Some wholesalers help small business owners ramp up their inventory by offering "starter packages," while others may extend financing to retailers who pay off the merchandise as it sells. Properly researched, negotiated, and financed, inventory costs may be kept to well under $20,000.
Advertising
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Although it is often treated as an afterthought, advertising is one of the largest and most critical expenditures facing small business owners. Even if a retail store is stocked with attractively priced, high quality merchandise--or if the telemarketing firm can perform its duties at half the price of competitors--these businesses are doomed if their clientel does not know about them. Getting the word out can result in significant expense, with ads in local newspapers or on local television easily reaching into the hundreds or thousands of dollars. Billboards, radio commercials, websites, and direct mail may also offer supplemental advertising at a somewhat reduced cost. Experts recommend setting aside as much as one-half of a business start up budget for advertising expenses, though new ad outlets like Google can help cut into these costs.
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