This guide is aimed at anyone looking to start a business or is curious about the potential costs of starting their own venture in the future. We’ll look at aspects such as the different types of insurance, rent, equipment, staffing, and banking, while providing examples from specific industries and the overall startup costs.
The Initial Costs of Starting a Business in the UK
Before launching a business, whether physical or online, you’ll need to map out exactly what your startup costs will be, which can vary significantly depending on the industry, location, and size of the business. However, there are some core expenses that most new businesses in the UK will encounter at launch.
Business registration and legalities
Registering as a sole trader with HMRC is free, but incorporating a limited company through Companies House costs from £12 for the standard online service. Many new business owners also employ the services of an accountant to handle initial filings, and a solicitor if contracts, shareholder agreements, or terms and conditions need drafting, which increases costs.
Licences and permits
Some industries require specific licences and permits to operate, for example, an alcohol licence or FCA authorisation for anyone offering financial services. Business licences can range from under £100 for a basic permit from a local authority to a few thousand pounds in heavily regulated sectors.
Insurance
The three types of insurance most physical businesses need are public liability insurance, professional indemnity cover, and employers' liability insurance. The cost of this insurance will typically be a few hundred pounds a year. However, this can increase if a company is deemed to be higher risk, such as employee injuries being more likely, having significant public footfall, handling hazardous materials, or dealing with highly sensitive data.
Premises and Equipment
Businesses that require physical premises will likely need to pay a deposit, which can sometimes be equivalent to three months' rent. Businesses like bars can also be expensive to fit out, especially if gas beer pumps need to be installed, while a small office or pop-up store will likely be much cheaper. Business rates are also a major expense and are dictated by the size, location, and value of a property.
Alternatively, online businesses are obviously far less costly to set up, but not free, and factors like computer hardware, software subscriptions, phone contracts, energy, broadband, and stock (for eCommerce stores) need to be budgeted for.
Stock and Supplies
If you plan on selling products, then you will need initial inventory, which can be one of the highest up-front costs for small businesses, depending on the quantities needed. Some suppliers may also set a minimum order, which might exceed what you need to begin operating.
Marketing and Branding
The vast majority of businesses need a logo and website, and some may need professional marketing services to raise brand awareness and drive leads. Other considerations are pay-per-click and social media advertising, print media, influencer marketing, and events. These costs can range from a few hundred pounds to thousands, especially if you don’t have the in-house capability.
Working Capital
Every business needs day-to-day funds to cover running costs and any teething issues before they start making consistent revenue. This is often overlooked by many people starting their first business, and many advisers suggest having enough available cash to cover the first three to six months of operating expenses.
Business Insurance: A Detailed Overview
Insurance is a mandatory cost that can sometimes be underestimated until an incident occurs. For certain businesses, specific cover is a legal requirement, while others are important to manage potential risks. Many insurers offer combined business insurance packages that bundle public liability, employers' liability, and contents cover at a reduced rate compared to buying them separately. However, it's worth comparing quotes annually as the business grows.
Employers' Liability Insurance
If you intend to employ staff from the start, then this cover is a legal requirement under the Employers' Liability (Compulsory Insurance) Act 1969, with a minimum of £5 million cover. This type of cover protects businesses against claims from employees who are injured or become ill because of their work. Operating without it when required can result in fines of £2,500 for every day you're uninsured.
Public Liability Insurance
Public liability insurance isn’t a legal requirement but is a must-have for businesses that deal with customers, clients, and the general public face-to-face. It covers compensation claims if someone is injured or their property is damaged as a result of your business activities. Many landlords, venues, and client contracts will insist on new businesses providing proof of this cover.
Professional Indemnity Insurance
Crucial for service-based businesses, such as consultants, designers, accountants, and IT contractors. This type of insurance covers claims of negligence, errors, or inadequate advice that cause a client financial loss. Some professional bodies require it as a condition of membership.
Product Liability Insurance
If you manufacture, supply, or sell physical products, this covers claims arising from a product causing injury or damage. It's often bundled with public liability as part of a combined policy.
Business Contents and Buildings Insurance
Insurance to cover your premises, equipment, stock, and fixtures against risks like fire, flood, or theft. If you work from home, you’ll need to check your existing home insurance because it's unlikely to cover business equipment or liability without an add-on.
Business Interruption Insurance
This compensates for lost income if your business can't operate normally due to an insured event, such as a fire or flood damaging your premises. It typically covers loss of revenue and ongoing costs like rent and salaries.
Cyber Insurance
As the handling of customer data online has become more prevalent, this type of insurance has become increasingly more important. This insurance covers the costs associated with things like a data breach and ransomware attacks.
Business Bank Accounts and Accessing Small Business Finance
It’s crucial to set up ways to manage your business finances from the outset, including filing tax returns, monitoring cash flow, and accessing finance and funding. Below is a list of what you need to consider to make managing the finances of your new business easier.
1. Business Bank Accounts: For limited companies, a separate business bank account is a legal requirement, as its finances must be kept separate from your personal ones. Sole traders aren't legally required to have one, but it's still strongly recommended because it simplifies bookkeeping and makes tax returns easier.
2. Business Overdrafts and Credit Cards: A business overdraft is useful to overcome any short-term cash flow issues, while a business credit card can be used to manage expenses and can help build the credit history of your company.
3. Start Up Loans: The government’s Start Up Loans scheme offers loans to new businesses of £500 to £25,000 at a fixed interest rate. This scheme is aimed at businesses who may struggle to secure finance using traditional channels and also offers free mentoring services.
4. Small Business Grants: Using the UK Government's business finance support finder, new businesses can apply for grants that do not need to be repaid. However, these grants are usually sector-specific, regional, or are linked to initiatives such as green technology, boosting innovation, and increased UK exports.
5. Invoicing Financing: New businesses that do not have many assets but have a large number of unpaid invoices may be able to access finance by borrowing against these outstanding invoices.
6. Crowdfunding and Angel Investment: Ambitious businesses looking to grow quickly can pitch to investors on platforms like Crowdcube to enable equity crowdfunding. Meanwhile, angel investors provide an alternative route, offering capital in exchange for equity, connections, and expertise to help businesses meet their growth goals quickly.
7. The Growth Guarantee Scheme: The government's Growth Guarantee Scheme helps smaller businesses access finance by guaranteeing a portion of the loan to the lender, making banks more willing to lend to businesses that might otherwise be seen as too high-risk.
Business Broadband and SIM contracts
Modern businesses cannot operate without reliable and affordable connectivity, with competitive business broadband packages and mobile deals a key consideration to avoid any problems once your business is up and running.
Business broadband costs more than residential broadband but comes with benefits such as higher-priority customer service, service level agreements (SLAs) to guarantee speed and uptime, unlimited data as standard, and the option to use static IP addresses.
Comparing Business Broadband
The availability of business broadband will depend on location, with areas that have access to Full Fibre (FTTP) usually benefiting from the fastest speeds and higher reliability. For new businesses that are expected to have significant usage, like those that will use cloud-based computing, video conferencing software, and a high number of users, a leased line may be the best option.
Business broadband contracts are typically 12, 24, or 36 months in length, with longer terms usually bringing lower monthly costs but less flexibility. It’s also worth comparing early termination fees, particularly if you're a new business that might relocate or scale quickly.
Business SIM contracts
SIM-only contracts are a more affordable option for companies that make a high volume of phone calls, such as those with direct sales teams. This means that employees can use their existing mobile if they have dual-SIM capabilities, or the business can source their own smartphones for a lower price compared to the packages offered by big providers.
When comparing business SIM cards, new business owners should focus on inclusive data or usage limits to avoid potential overcharges, customer service ratings, and outage compensation policies. Ofcom's automatic compensation scheme applies to some business customers for major service failures, though eligibility varies by provider and contract type.
Glossary
Public Liability Insurance: Cover for compensation claims if a customer or member of the public is injured or their property damaged.
Employers' Liability Insurance: Legally required cover protecting businesses against claims from employees injured or made ill by their work.
Professional Indemnity Insurance: Cover for claims of negligence or poor advice that cause a client financial loss.
Product Liability Insurance: Cover for claims arising from injury or damage caused by a product.