How much does it take to start a web development firm? All things considered, it is relatively inexpensive to get up and running. Chances are, you already own your own computer and the software necessary to do your job.
If you are doing this on your own, you will be working out of your home for a while. There is no inventory to buy and, if you’re proceeding as most people do, there are no employees to pay. Compared to other industries you could be in, you won’t be doing too badly.
NECESSITIES AND NICETIES
So, what’s left to spend money on? Here are some basics that will be covered in depth later in this series:
- Forming your business entity.
- Retaining an attorney, accountant, or other professional.
- Purchasing an accounting program.
- Purchasing business insurance.
All totaled, you could spend as little as a few hundred dollars or as much as a couple thousand on these items. Those listed above are the essentials — the things you need to even call yourself a business. Then there are supplemental items, which are almost as important:
- Business cards.
- Business-dedicated phone line.
- Domain name.
- Personal Web site hosting.
- Hardware/software upgrades.
Those things shouldn’t add up to too much more over what you have already paid for the necessities. And, with some effort, you can skimp on some of them. For example, you can make the printed items on a good inkjet printer until you have a little more to spend for the real thing. Or you could forward your domain name to a free host.
Many business surveys have revealed that most small businesses are started on less than $5,000. That would certainly seem to be the case with web development. Some people dip into their savings to start their firm. Others work a full-time job for someone else, building their practice in their free hours. It may take time, but determined entrepreneurs can start their firms on shoestring budgets.
But if you are going to do this full-time, you are going to eventually need to spend some money on advertising. Banner ads, Yellow Pages, billboards, radio spots, TV airtime, newspaper and magazine ads, are some ways to get your name out. You probably won’t want to invest in all of them, but even one can cost significant money — maybe more than you are prepared to spend right away. At this point, some outside help may be just what you need to get the ball rolling.
Borrowing money to invest in your business is a very common practice and should be seriously considered if you want to expand your business in a relatively short amount of time.
GETTING A LOAN
There are three basic kinds of loans you can get:
Line of credit
A line of credit is a loan that works much like an ordinary credit card. The bank makes a certain amount available to you, and you only draw from it what you need. You pay interest on the amount you are using, not the entire amount available. There are two kinds of lines of credit: personal and commercial. Commercial lines of credit are preferable to personal lines of credit because the amount of the loan is secured by company, not personal, assets. The trade-off is that commercial lines are usually harder to qualify for. The amount that you qualify for and your interest rate will depend on the collateral you have available, your credit history, your cash flow needs, and the risk perceived by the lender.
Often, this is the easiest loan to acquire. There is a reason. The interest rate on a credit card is generally the highest of any other kind of loan. Higher interest rates mean that the credit card company is willing to accept a greater risk, so people who did not qualify for other kinds of loans are may be able to get a credit card. There is also less hassle getting a credit card. Many companies allow you to apply over the internet or over the phone with minimal information. Of course, one piece of that information will be your social security number. Credit cards are always tied to an individual, so you will be personally guaranteeing the outstanding balance. A credit card offers many benefits that other kinds of loans do not have. Automatic insurance against damaged goods, airline credits, and annual cash rebates are just a few of the perks credit card companies give you. Many times this is the best option for entrepreneurs who are just starting out. Credit cards are accepted many places and most business owners don’t need to have a business history to be accepted.
Small business loan
If you are feeling daring, you can apply for a small business loan. This type of loan generally has the lowest interest rate of any other option, but there are a couple catches. First, you pay interest on the entire loan, regardless of how much you are using at the time. Second, they are the most difficult to qualify for. Banks generally like to see a 30 to 36 month history of paying your bills on time, sufficient collateral to cover the loan, significant cash flow to service the debt, and a reasonable balance between your debt and equity. You will also be expected to have invested a significant amount of your personal funds into your firm. After all, why should they take the risk of your business failing if you are not willing to?
The US government recognizes that many small business cannot qualify for a small business loan on their own. If you are still interested in this form of financing, but don’t otherwise quality, you can seek help from the SBA. The SBA has many programs to assist small business in acquiring the capital they need. Among their most popular programs are the 7(a) Loan Guaranty (which guarantees the lender repayment of your loan) and the Microloan Program (which provides loans for $100 - $25,000.)
There are also less formal ways to borrow money to expand your business. Borrowing against the equity of your home is one option. With sufficient home equity, this kind of loan is relatively easy to qualify for, and has the advantage of being tax-deductible. Some firm owners form a money pool with friends or relatives, who are less likely to closely scrutinize the borrower. Whatever you decide, make sure the transaction is well-documented and contains a clear method for the loan to be repaid.
Things you should have when requesting money from anyone (except possibly credit card companies who don’t really care about anything except having your SSN):
- Full business plan. Include all general information, market research and projected financials.
- How much money you need and a detailed description of exactly what you need the loan for.
- Copies of your business and personal credit reports along with documentation explaining any derogatory remarks on them.
Remember that a lender’s primary concern is your ability to repay the loan. If you can adequately demonstrate your ability to do that through your business plan, your commitment to your firm, and your previous repayment history, most lenders will be happy to work with you.
Now that you have the money you need to get off the ground, you’ll need some people to help you out. Next time we’ll talk about selecting professionals to take care of the mundane and give you time to take care of the creative.