Startup Costs: What Are They & How Should You Fund Them?

There’s certainly a lot to think about when you’re on the cusp of starting your own business. No worries, though - we can handle this! One topic in particular – startup costs – isn’t always top of mind but shouldn’t be overlooked. These expenses will need to be covered if you want to build a sustainable and profitable business. So let’s talk about what startup costs are and how you should prepare for them.

What Are Startup Costs?

Startup costs are the things that you have to spend money on to create and start your business. While you might not be able to acquire everything you need all at once, you still need to know what these items are and have a plan in place to secure them so your business will be able to operate.

Some examples of startup costs include formation expenses (e.g., the cost of filing legal papers to establish the type of business, whether it be a sole proprietorship, limited liability corporation (LLC), partnership, or corporation), the software you’ll need to create and sell your service or product, any necessary equipment, and whatever you need to set up your home or commercial office space (e.g., a business phone line, furniture, computer, etc.) You’ll also need to purchase whatever is needed to initially provide your product or service like inventory and packaging materials (these later become ongoing costs).

Be aware that many of these expenses may be one-time costs that don’t repeat. In other words, they will differ from the ongoing costs that you’ll encounter while operating your business. They also tend to be larger expenditures.

How Should I Fund These Expenses?

Since there’s no way around having to cover startup costs, it’s important to have a plan in place to afford them. Whenever possible, it’s always best to save up money to fund these expenses or to tap into existing resources. Most importantly, unless your business requires a large outlay of money right upfront for expensive equipment or something of that nature (like a laundromat that needs multiple washing and drying machines or a tech company that requires several servers, engineers, and equipment), avoid going into debt.

There are several reasons why it’s crucial to steer clear of taking out a loan and saddling yourself with debt to pay for your startup costs. First, there’s absolutely no guarantee as to when (or even if) your business will make money. Even if your business is projected to make money, it might not — or not as quickly as you expect. And even when you do start to bring in revenue, initially you’re only going to break even and won’t want to delay your point of profit even longer because you still have a lot of debt to cover. It will probably take a while for your business to become profitable (this is completely normal!) The last thing you want to do is start out in a deep hole of debt.

Another reason to avoid debt is because ultimately you don’t know if your business is going to end up being sustainable or not. Say you make the decision to pivot into something else at some point — that debt is still going to be there, following you around. Remember: as the business owner, you will still be responsible for the repayment of the debt. It won’t go away even if your business no longer exists. Finally, keep in mind that the more debt you take on for your business, the larger the impact on your personal credit [How to Tackle Personal Debt (& Why SMB Owners Need To)].

Is It Important To Record Your Startup Costs?

Startup costs typically qualify as tax deductions. This is the case regardless of whether you have any sales or not your first year in business. As a result, it’s imperative that you keep great records of all your startup costs. There are several ways you can achieve this.

First, make sure to set up a business bank account that you keep separate from your personal accounts. Every month download your monthly business statement and save it as an electronic file, in addition to keeping electronic versions of all the receipts for your startup expenses. (Don’t save the paper receipts — after some time they’ll smudge and become difficult to read which makes them useless.) Finally, set up a bookkeeping system to track all of your business expenditures. (Although there are various options out there, Excel usually suffices during the early stages of the business.)

A Final Word From Tuesday Brooks Founder of AJOY

The key takeaway from this post is to use savings or tap existing resources (whenever possible!) to fund your business’s startup costs. Don’t be tempted by the various loans, credit cards, and lines of credit out there. Going into debt to start your business will only set you back and make it more difficult to achieve success (and a profit!) Instead, take your time and save in advance so you can cover all expected expenses.

Don’t get caught up in the excitement and rush into business. And then, once you’ve launched, be sure to maintain detailed and accurate records so you have a clear understanding of how much you’ve put into your business (down the road, investors or lenders might need to know this) and can also deduct the expenses on your tax return. Follow these tips and then rest easy in the knowledge that your careful planning and saving will pay off in the long run!