Every year, thousands of new start-up businesses are launched in the UK.
In fact, 2020 saw a huge rise in self-employment compared with 2019, as an extra 84,758 businesses were established.1 Also in 2020, 65% of UK employees said they wanted to start their own business.2
But from coming up with a business plan to finding the start-up costs, starting a small business isn’t always simple.
When setting up a small business, you might want to take your existing employed role – for example, a hairdresser, personal trainer or graphic designer – and turn it into a one-person enterprise. You might have found a commercial opportunity to capitalise on or want to monetise your favourite hobby, whether that’s crafting, pet care or gardening.
Whichever route you take, the cost of starting a business can sometimes feel like an obstacle to success. In this guide, we’ll help boost your confidence and understanding of start-up costs, by looking at:
- The outgoings you’ll need to consider at the planning stage
- How to calculate start-up costs
- How to secure the capital you need
What to consider when starting a business
At the very beginning of setting up a small business, everything is very exciting. Simply deciding you want to be a business owner is an empowering thing to do. However, there’s also a huge amount of work to get through.
Knowing what you're up against
The first step is to know your competition, which means doing some serious market research. Before you’ve written a word of your business plan - and before you’ve applied for your new business loan - market research is key. For this, you could use:
- Questionnaires – to ask your target audience key questions
- Social media – depending on the audience you want to target, you can choose between Facebook, Instagram, or Twitter
- Chatting with friends – this is a great way to test your ideas, but may be biased research
- Simply observing local businesses in your field – to find out how they work and what people like about them.
What makes your business different?
Look for gaps that your small business could fill and try to define what your USP (unique selling point) will be. This will inform your brand and how people ultimately think of your business.
For example, if you’re setting up a children’s nursery, maybe you’ll offer parents flexibility that’s not available anywhere else. Or, if you’re opening a bakery, maybe you’ll specialise in extraordinary occasion cakes.
The goal here is to try and make yourself stand out from the crowed. Ask yourself: What makes my business different to others?
Location, location, location
Once you’ve got a clear idea in mind of what your business will be and what it will offer, it’s time to decide where it needs to be.
If you’re setting out as a marketing consultant or online retailer, you could keep initial outlays low by basing yourself at home. Or, if you’re opening a cafe or an art gallery, you’ll need both space and visibility, so you will want to look for a good premises. Business start-up costs can quickly grow, so be realistic about what’s essential and what you can wait for.
Start-up costs for new businesses
The cost of setting up a small business can vary wildly from one enterprise to the next. For some, all that’s required is a back bedroom and a laptop. Others need a shop, a full rota of staff, backroom equipment and a full-scale marketing campaign to get going.
Escalating costs can stop some businesses before they even begin. To avoid this, double check which items are essential and which, at this early stage at least, are unnecessary luxuries.
Sometimes it’s better to apply some patience and wait until the profits start rolling in before you invest in business vehicles, hand-painted signage or costly marketing materials. At the start-up stage, you’re building the foundations for a healthy financial future.
How to calculate start-up costs
The question of how to estimate start-up costs when you have limited experience can leave you feeling a little perplexed. Begin by noting down everything you’ll need to start trading. This should be a comprehensive list including:
- Essential equipment
- Staff (if needed)
- Travel expenses
At this stage you should be thinking of ways to budget at every opportunity. Ultimately, you may want to take out a business start-up loan or chase some other form of investment. According to research, UK start-ups budget £5,000 to launch, however the average start-up based in the UK spends £22,756 in the first 12 months.3
When it comes to thinking about premises, do you need to work in the city? It costs an average of £523 per person per month to rent a flexible office space in London, falling to £359 in Leeds.4
Frequently, people who are new to the world of business forget to account for some key expenses. For example, if you run a gym, what insurances or health and safety certification might you need, and what will these cost?
If you decide to employ someone, you may have accounted for their wage, but not their recruitment or training. On average, UK business insurance is around £118 a year, but this can range from £50 into the hundreds if you need specialist insurance.5 It’s essential you plan for these hidden costs early on.
Another regular bill that sometimes comes as a surprise is business rates. Essentially, this is a council tax for businesses and, if you’re trading from a commercial building, you’ll be liable to pay it from the very beginning. Before planning your start-up costs, contact your local council for more information on business rates.
Financing a new business
Often, the one obstacle standing in the way of an individual and their dream of entrepreneurial endeavour is the question of how to go about financing a new business.
When it’s time to think about how to finance your small business, there are four main sources of cash:
- Savings – personal funds are debt-free, so you can ensure that any profit you make goes straight into your bank and you don’t have to worry about making monthly repayments. Just make sure you keep some of your savings back for a rainy day.
- Loans – if you don’t have access to any other funding, these are a useful way to fund your business
- Investments – these can come from another established business or from an individual, but it’s important to establish what is expected in return.
- Grants – if you’re starting a social enterprise, you may be able to access a small business grant.
You can choose the one which suits your situation the most, or you may want to access a combination of them all.
Benefits of business start-up loans
Lots of very successful businesses of all sizes have begun life with the help of a small business start-up loan. Creative entrepreneurs, inspired thinkers and hard grafters have all found that a little leg up can sometimes be all that’s needed to turn the seed of an idea into a thriving enterprise.
Taking out the right small business loan may help you start trading from a stronger position, with everything you need in place. The first few years you’re in business are usually the most expensive – when you look at outgoings as a percentage of turnover.
After those early days, lessons are learned, equipment is in place and initial costs (for example, recruitment and training) tail off a little. Your business may start to become more affordable and more profitable – on average, it takes between two to three years before a business becomes profitable.6
While financing a new small business may not be easy, it will be worth all the hard work when you’re up and running, and in control of your own destiny.