The Cost of Starting a Small Business
Many a worker dreams of using his expertise to launch a small business and be his own boss, but far fewer actually take the plunge into business ownership. Starting a small business can be a costly process in terms of actual costs and opportunity costs -- costs that arise from not doing other things. Many new businesses fail within the first couple of years, making the cost of starting a business an uncertain investment.
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Function of the Business Model
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Small businesses usually require some startup costs before they can earn revenue. The business model of the small business -- what the business does, how it does it and how it receives money from customers -- is the most important factor in determining startup costs. Traditional businesses, like retail stores and restaurants, require significant startup money. Less traditional ones, such as services companies or online businesses, may have minimal startup costs. For instance, a graphic designer who decides to start a design business might only need a computer and design software to begin selling services.
Types
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There are many types of costs likely for new business owners. Rental costs for an office or other business space is a common expense. Purchasing equipment is another cost that can amount to tens of thousands of dollars depending on the type of business. For instance, a photography business might require several state-of-the-art cameras, high-end computers and software for editing, and lighting equipment. Other common costs include advertising, labor, licensing and legal fees.
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Effects
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The costs of starting a small business often act as a barrier to entry to different markets. A barrier to entry is something that makes it difficult to enter a market. For instance, if it requires $50,000 of startup capital to get into the retail hardware business, that barrier might make it difficult for those with little savings or poor credit to open a hardware store.
Potential
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Small business owners can potentially cover some or all of the costs of launching a venture with small business loans or financial backing from investors who believe in their concept. Attracting financial backing and loans typically requires a strong business plan and proof that the team launching the business has the expertise necessary to execute the plan.
Considerations
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Many small business owners put a significant amount of their own money into starting businesses. Since many small businesses fail, it is likely that startup costs will be lost. For the best chances of success, it is important that you are passionate about your business and making it succeed.
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