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Summary:

So, you’re ready to do it: the time has come to quit your full-time job, go independent, and join the self-employed web worker economy. Only one thing stands in your way: the necessity to keep paying the rent and buying groceries while your new microbusiness gets […]

So, you’re ready to do it: the time has come to quit your full-time job, go independent, and join the self-employed web worker economy. Only one thing stands in your way: the necessity to keep paying the rent and buying groceries while your new microbusiness gets on its feet. What’s a web worker to do?

Fortunately, the actual cash demands of most independent web work businesses are modest: a computer, an internet connection, and some specialized software. But there are circumstances in which you might need to invest more money: if you’re trying to make a splash as a designer, you’ll probably need web hosting and maybe even some print marketing materials. If you’ve got an idea for a killer web service and you need to hire other developers to help make it a reality, salaries have to come from somewhere. There are a variety of choices for startup cash, each with their own pros and cons.Use Your Savings. This is the safest way to get going, if you value not being stuck owing money to someone else. If you can live off of money in the bank while you’re getting your business going, you can continue to make all of your own decisions without being responsible to banks or investors. The drawback, of course, is that the time you can spend earning that first big check is limited by the size of your savings account, which for most people these days is fairly small.

Tap Friends and Family. If anyone is going to believe in your prospects, mom and dad are the most likely. If you have some plan for generating excess income, above your own needs, you can take in private loans from friends and family and offer to pay a reasonable interest rate. If you go this route, you should make crystal clear whether you’re taking money as loans or gifts, what interest you propose to pay – and what you’ll do if things go horribly wrong. Major drawback: the chance of losing friends or alienating family.

Small Business Loans – In the US, the Small Business Administration can help you get a loan from a bank or other lender. Alternatively, if you’ve been banking at a small and friendly bank for years, you can talk to the loan officer directly about their small business products. To get such a loan, you’re going to have to present serious business plans and pay real bank interest – 8% to 12% is typical at the moment. For an independent web workers, this can be a daunting set of hurdles.

Venture Capital – We’ve all seen the stories about VC-backed sites that make a bundle of money for all concerned. But even if your web work dream is to build an online powerhouse, you need to think twice about VC money. Typically, you’ll give up both a substantial chunk of ownership and control to get funding, and end up with a boss (or a board of bosses), which may be what you were seeking to escape in the first place. But if you need half a million dollars or more, this may be the only feasible way to get the money.

There are a few other ways to fill in startup financing gaps – factoring, for example, where you sell your accounts receivable to someone at a discount – but they tend to be useful only in very specialized situations. For most of us, getting started boils down to having enough money to make it through the months until checks start coming in, and ruthlessly cutting expenses.

If you’ve made the jump to independent web work recently, how did you finance it?

Related:

Work for Yourself: Can You Afford to Make the Switch?

  1. My goal is to build my business with cash only. I understand the concept of leveraging other peoples money. But I’m patient and want to build my business for the long haul.

    Debt can be good. But in a recession, cash rules!

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  2. Nice article. I agree self-funded is the best if you can do it. There is another type of investor called the “micro cap” investor. They are somewhere in between the VC and Angel. They look for self-funded startups that are getting significant traction and must decide to grow quickly to keep up. They like to “pour fuel on the fire” rather than validate ideas. Also Y-Combinator is an interesting model.

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  3. I started my business 3 years ago by using my existing contact network to do web consulting jobs to bring in money to pay the bills while I worked over and above that to build new products that were intended to be the core of my new business.

    What actually happened though is that the consulting work became so successful that the original product ideas have fallen by the wayside and I’m currently in the process of remodelling my compay to be clearer that we are a web consultancy first and foremost.

    My advice for people starting up in consultancy is to make sure you secure yourself at least one paying client before you dive in, preferably more! And bear in mind that as soon as you secure one job to start paying the bills you need to start looking for the next.

    Good luck!

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  4. There’s surprisingly little red tape here in Finland (and other Nordic / Central-European countries as well, at least according to The Economist).

    Don’t know the details about Anglo-American world, but my suggestion is to go limited right from the start (legislation permitting), with absolute minimum capital (use cheap loans and/or savings).

    Then, after running the business for a while (you had those clients ready, didn’t you?) if you need any extra capital go for VCs and loans that you can take against your company.

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  5. I also agree with Lasse’s posting. If you start of working with your own savings you learn to make wise investments and to stretch your dollars in order to maximize your investment.

    You may be lucky enough to find an individual to invest in your company, but if you (as a the CEO or president) don’t know or understand the value you bring to the marketplace then it doesn’t do anyone any good.

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