How much does it take to start an independent contracting business? What are the main things we need to spend money on? Can we get started with a small budget, and what things should we avoid spending on unnecessarily?
This guide will provide you with essential information to assess how much it really takes to embark on this journey.
And if you need more detailed information please check our business plan for an independent contracting business and financial plan for an independent contracting business.
How much does it cost to work as an independent contractor?
What is the average budget?
Starting an independent contracting business typically requires an initial investment ranging from $5,000 to $150,000 or more.
Let's delve into the factors influencing this budget.
The nature of your contracting business is a significant cost determinant. Specialized services, like electrical or plumbing work, often necessitate more expensive tools and equipment than general handyman services. For instance, high-quality plumbing tools and equipment could cost between $2,000 to $15,000.
Your geographical location also plays a role. If you're operating in a high-cost urban area, your expenses for transportation, insurance, and licensing may be higher compared to a rural setting.
Insurance is another crucial expense. General liability insurance and other types of coverage are essential for protecting your business, with costs ranging from a few hundred to several thousand dollars annually.
Licensing and certification fees can vary greatly depending on the trade and location. Some certifications might cost a few hundred dollars, while others, especially those requiring extensive training, could run into the thousands.
Marketing and advertising are also important, especially when starting. Allocating a few thousand dollars for marketing efforts like website development, online advertising, and branded materials is advisable.
Is it possible to start an independent contracting business with minimal funds?
Yes, but it requires careful planning and a scaled-down approach.
For a minimal setup, you could start as a sole proprietor working from home, significantly reducing initial costs. You might only need basic tools, which could range from $500 to $3,000, depending on your trade.
Instead of investing heavily in advertising, focus on building a client base through word-of-mouth and free or low-cost online marketing strategies, like social media and local listing sites. Budget around $500 for initial marketing efforts.
You may also start with essential insurance coverage, costing a few hundred dollars, and expand your coverage as your business grows.
In this scenario, the initial investment could be as low as $1,000 to $5,000.
However, starting on a small scale may limit your capacity to take on larger projects or multiple clients simultaneously. As your business expands, you can reinvest profits into more advanced tools, expanded marketing, and additional insurance coverage.
Finally, if you want to determine your exact starting budget, along with a comprehensive list of expenses customized to your project, you can use the financial plan for an independent contracting business.
What are the expenses to work as an independent contractor?
Please note that you can access a detailed breakdown of all these expenses and also customize them for your own project in the financial plan for an independent contracting business.
The expenses related to the location of your independent contracting business
Is a physical location necessary for an independent contracting business?
Starting an independent contracting business offers two main options: establishing a physical office or operating exclusively online.
Each choice has its pros and cons, influenced by factors such as your business model, client base, personal preference, and budget.
A physical office for an independent contracting business brings several benefits. It enhances your professional image, instills trust in clients, and strengthens your local market presence. It provides space for equipment, meetings, and team collaboration. However, it also incurs significant costs like rent, utilities, insurance, and maintenance, which can be a heavy load for a startup.
On the flip side, running your business entirely online greatly cuts down on overhead costs and allows for greater flexibility in client reach and working hours. But it may challenge your ability to establish a strong local presence and client trust, especially in markets with strong competition from businesses with physical locations.
Here is a summary table.
| Aspect | Starting with an Office | Starting 100% Online |
|---|---|---|
| Professional Image | ✔️ | 🚫 |
| Local Presence | ✔️ | 🚫 |
| Equipment and Storage Space | ✔️ | 🚫 |
| Client Meeting Space | ✔️ | 🚫 |
| Team Collaboration | ✔️ | 🚫 |
| Higher Costs | ✔️ | 🚫 |
| Limited Mobility | 🚫 | ✔️ |
| Initial Investment | ✔️ | 🚫 |
| Flexibility | 🚫 | ✔️ |
| Wider Client Reach | 🚫 | ✔️ |
| Lower Overhead | 🚫 | ✔️ |
| Credibility Challenge | 🚫 | ✔️ |
| Local Market Competition | ✔️ | 🚫 |
| Client Communication | ✔️ | 🚫 |
If you decide to rent space for your independent contracting business
Estimated budget: between $2,000 and $6,000
Renting a space typically involves costs like the security deposit and first month's rent upfront. For a modest space at $600 per month, you may need $1,200 for the initial deposit and rent, plus additional funds for the next few months. Legal fees for lease review and potential real estate broker fees should also be considered.
If you decide to buy space for your independent contracting business
Estimated budget: between $60,000 and $350,000
Purchasing costs vary based on size, location, and condition. In addition to the purchase price, budget for closing costs, renovation expenses, property assessment fees, property taxes, and insurance. These can significantly add to the initial investment but provide long-term asset value.
Marketing, Branding and Communication
Estimated Budget: $3,000 to $7,000 for the initial phase
For independent contractors, branding, marketing, and communication are crucial for carving out a niche in a competitive market.
Branding for an independent contractor is about establishing a trust-based relationship with clients. It's more than just a business card or a website. It involves showcasing your expertise, reliability, and quality of work. Your brand is reflected in the professionalism of your interactions, the clarity of your project proposals, and the consistency in delivering exceptional results.
Do you position yourself as a specialized expert or a versatile jack-of-all-trades? This brand identity influences everything from your online portfolio to the way you dress for client meetings.
Marketing is your tool to broadcast your services to potential clients. It's crucial to understand that clients won't magically find you. Effective marketing means creating a strong online presence where clients look for contractors. This could be specialized LinkedIn content demonstrating your expertise, or targeted Google Ads to reach clients searching for your specific services.
For an independent contractor, a focused approach is key. Instead of broad, generic advertising, tailor your marketing to the specific industries or local businesses that could benefit most from your services.
Communication is about building and maintaining strong client relationships. It's the detailed emails that outline project progress, the phone calls that address client concerns, and the follow-up messages that show your commitment to client satisfaction. Excellent communication is what turns first-time clients into repeat customers and brand advocates.
For your marketing budget, expect to spend approximately 3% to 8% of your revenue. Starting small and gradually increasing as your client base grows is a smart approach.
Allocate your budget wisely. Invest in a professional-looking website, networking events, and maybe some industry-specific advertising. Adjust your spend based on the results you see. For instance, if LinkedIn brings in more clients, consider boosting your presence there.
Staffing and Management
Estimated Budget: $1,000 - $5,000 for the first month
In the realm of independent contracting, staffing and management expenses are often more flexible and variable compared to traditional businesses like bakeries.
Let's delve into the specifics.
Many independent contractors start as solo entrepreneurs, handling all aspects of their business. This can be manageable initially, but as your client base grows, you might consider outsourcing certain tasks or hiring part-time assistance.
Key roles that an independent contractor might outsource or hire for include administrative support for scheduling and client communication, a bookkeeper for financial management, and potentially a marketing specialist to enhance your business visibility.
As your contracting business expands, you might find the need for a project manager or additional skilled professionals to handle a larger volume of work or to provide expertise in areas outside your specialization. This expansion typically happens several months in or when your workload consistently exceeds your capacity to manage alone.
When it comes to compensation, it's common to pay any hired help or outsourced services right from the start of their engagement. Delaying payment can lead to dissatisfaction and a lack of commitment.
Besides their fees or wages, consider additional costs such as taxes and any necessary insurance, which can add around 10-20% extra on top of their direct costs.
Training is also an important factor for an independent contractor, particularly in areas like new technologies, advanced skills in your field, or even business management. Initially, this might mean budgeting for a few online courses or workshops, which can vary in cost. Allocating a few hundred dollars to ongoing professional development is a prudent approach.
This investment in training and development not only enhances your own skills but also ensures that any staff or outsourced services are up to par with your business standards, contributing to your reputation and success.
| Job Position | Average Salary Range (USD) |
|---|---|
| Freelance Web Developer | $40,000 - $100,000 |
| Independent Graphic Designer | $35,000 - $80,000 |
| Consulting Engineer | $60,000 - $120,000 |
| Freelance Writer | $30,000 - $70,000 |
| Photographer | $25,000 - $80,000 |
| Virtual Assistant | $25,000 - $50,000 |
| Independent Sales Representative | $40,000 - $90,000 |
Please note that you can access a detailed breakdown of all these expenses and also customize them for your own project in the financial plan for an independent contracting business.
Professional Services
Starting with a lawyer, for an independent contracting business, this isn't just about the basic business setup.
A lawyer can help you understand the specific legal requirements related to contracting work, such as contracts, liability issues, and licensing. They're particularly crucial for drafting and reviewing client contracts to protect your interests in case of disputes or delays. The cost will depend on their experience and location, but an independent contractor might spend around $1,500 to $4,000 initially.
Consultants for an independent contracting business are invaluable for those entering the field for the first time.
They can provide insights on market rates for your services, effective marketing strategies, and help in identifying profitable niches. They may also advise on project management tools and software, which are essential for keeping your projects on track. Consultants in this field might charge between $50 to $200 per hour.
Bank services for an independent contractor are crucial for managing finances effectively.
Aside from a business account or loans, it’s important to have a sound invoicing system and possibly access to a line of credit to manage cash flow, especially between projects. The costs for these services will vary based on the bank and your specific needs.
Insurance for an independent contracting business is vital, covering risks like accidents on the job site or damages caused during a project.
General liability insurance and professional indemnity insurance are essential. The cost of these insurances can range significantly based on the nature of your contracting work, potentially from $500 to $3,000 annually, depending on your coverage.
Additionally, for an independent contractor, continuous professional development is key. This might include attending workshops, obtaining certifications, or staying updated with industry standards and technologies. While this is an ongoing cost, it's crucial for maintaining competitiveness and ensuring high-quality work.
| Service | Description | Average Cost |
|---|---|---|
| Legal Services | Assistance with legal requirements, contracts, liability, and licensing. | $1,500 - $4,000 initially |
| Consulting Services | Advice on market rates, marketing strategies, project management tools, and identifying niches. | $50 - $200 per hour |
| Bank Services | Business account, invoicing system, and possibly a line of credit for cash flow management. | Varies |
| Insurance | Covering accidents, damages during projects, general liability, and professional indemnity. | $500 - $3,000 annually |
| Professional Development | Workshops, certifications, and staying updated with industry standards and technologies. | Ongoing cost |
Ongoing Emergency Funds
Estimated Budget: $5,000 to $30,000
When you're starting an independent contracting business, having an emergency fund is absolutely crucial.
Think of it as a financial safety net as you navigate the challenges of running your contracting enterprise. You hope you won't need it, but it's indispensable for your peace of mind and the security of your business.
The specific amount you should allocate for your emergency fund can vary based on the scale and nature of your contracting work. However, a general guideline is to have enough to cover at least 3 to 6 months of your operating expenses. In the context of an independent contracting business, this typically translates to a range of $5,000 to $30,000.
It's important to acknowledge that these figures can fluctuate based on factors such as equipment maintenance, materials costs, personnel wages, marketing expenses, and your service offerings.
One of the primary reasons for maintaining this fund is the unpredictability in the contracting industry. Unexpected challenges can arise, such as project delays, unexpected equipment breakdowns, or fluctuations in demand for your services. These situations can have a significant impact on your cash flow if you're not well-prepared.
To mitigate these potential setbacks, it's not enough to just create an emergency fund; you must also focus on efficient financial management.
For instance, managing your project pipeline effectively and avoiding overcommitment is crucial to ensure you don't spread yourself too thin. Regularly evaluating your project portfolio and adjusting your services based on client needs is essential to avoid potential financial pitfalls.
Furthermore, building strong relationships with your clients, suppliers, and subcontractors can be invaluable. They may be willing to offer favorable terms, referrals, or additional projects during challenging periods, which can help alleviate cash flow challenges.
Another key aspect is maintaining vigilant financial oversight of your contracting business. Regularly reviewing your financial statements allows you to spot trends and address potential issues before they escalate into major financial concerns.
Moreover, consider diversifying your service offerings or targeting new markets to generate multiple income streams. For example, if you primarily focus on residential projects, explore opportunities in the commercial sector or offer specialty services to enhance your revenue potential.
Lastly, never underestimate the power of providing top-notch service and fostering local community connections. Satisfied clients and strong local relationships can lead to repeat business, referrals, and a stable source of revenue for your independent contracting business.
Please note that you can access a detailed breakdown of all these expenses and also customize them for your own project in the financial plan for an independent contracting business.
For an independent contracting business, which expenses can be eliminated?
Managing expenses wisely is crucial for the long-term success of your independent contracting business.
Some costs can be unnecessary, others may be overspent, and certain expenses can be delayed until your business is more established.
First and foremost, let's talk about unnecessary costs.
One common mistake contractors make is investing too much in high-end tools and equipment right from the start. While quality tools are important, remember that you can often rent or buy slightly used equipment at a lower cost. Focus on acquiring only the essential tools needed for your initial projects.
Another area for cost savings is marketing. In today's digital world, there are cost-effective ways to promote your services. Instead of expensive traditional advertising, consider leveraging social media, creating a professional website, and utilizing local online forums. These methods can be highly effective and more budget-friendly.
Now, let's discuss expenses that contractors often overspend on.
A common pitfall is renting a large office or storage space too soon. Initially, you might not need much space, so consider starting with a home office and renting storage space only as needed. This approach can significantly reduce your monthly expenses.
Also, be cautious with hiring too many employees or subcontractors early on. Start with a small, efficient team and expand as your client base and project demand grows. This strategy helps manage labor costs and maintains operational efficiency.
When it comes to delaying expenses, consider holding off on purchasing a company vehicle or heavy machinery. Initially, you can rent these as needed or use your personal vehicle, if feasible. Delaying these purchases until you have a stable income stream helps avoid straining your finances.
Another cost you can delay is investing in specialized software or custom systems. Begin with basic, widely-used software solutions and upgrade as your business needs become more complex and your budget allows.
Examples of startup budgets for independent contracting businesses
To give you a clearer picture, let's break down the budget for three different types of independent contracting businesses: a small-scale contractor with basic equipment, a standard contracting business offering a range of services, and a high-end contracting business with top-tier equipment and services.
Small-Scale Contractor with Basic Equipment
Total Budget Estimate: $20,000 - $40,000
| Category | Budget Allocation | Example of Expenses |
|---|---|---|
| Equipment (Basic Tools) | $5,000 - $10,000 | Basic hand and power tools, safety gear |
| Vehicle and Transportation | $5,000 - $10,000 | Used vehicle or van for transport |
| Licensing and Insurance | $2,000 - $4,000 | Contractor license, liability insurance |
| Marketing and Advertising | $1,000 - $3,000 | Local advertising, business cards, simple website |
| Supplies and Materials | $2,000 - $5,000 | Initial stock of common construction materials |
| Miscellaneous/Contingency | $5,000 - $8,000 | Unforeseen expenses, emergency fund |
Standard Contracting Business
Total Budget Estimate: $50,000 - $100,000
| Category | Budget Allocation | Example of Expenses |
|---|---|---|
| Equipment (Upgraded Tools) | $20,000 - $30,000 | Quality power tools, specialized equipment |
| Vehicle and Transportation | $15,000 - $25,000 | New or nearly new vehicle, possibly multiple |
| Licensing, Insurance, and Permits | $5,000 - $10,000 | Comprehensive insurance, permits for various services |
| Marketing and Branding | $5,000 - $10,000 | Professional website, social media campaigns, branding materials |
| Staffing and Training | $10,000 - $20,000 | Skilled laborers, training programs |
| Miscellaneous/Contingency | $10,000 - $20,000 | Emergency fund, unexpected expenses |
High-End Contracting Business
Total Budget Estimate: $100,000 - $200,000
| Category | Budget Allocation | Example of Expenses |
|---|---|---|
| Equipment (Top-Tier Tools) | $40,000 - $70,000 | State-of-the-art equipment, high-end tools |
| Vehicle and High-End Transportation | $30,000 - $50,000 | Premium vehicles, possibly a small fleet |
| Licensing, Insurance, and High-Level Permits | $10,000 - $20,000 | Top-tier insurance, all necessary permits |
| Marketing and Premium Branding | $20,000 - $30,000 | Advanced marketing strategies, high-end branding and publicity |
| Staffing and Expert Training | $20,000 - $40,000 | Highly skilled professionals, advanced training and certifications |
| Miscellaneous/Contingency | $20,000 - $40,000 | Contingency for high-end projects, unforeseen high costs |
How to secure enough funding to work as an independent contractor?
Primarily, independent contracting businesses often rely on a mix of personal savings, loans from banks, and contributions from family and friends.
The reason for this is that independent contracting businesses, being typically small-scale operations, might not attract the interest of larger investors like venture capitalists, who usually seek high-growth, scalable businesses.
Additionally, while there are grants available for various business purposes, they are less common for sectors like contracting, which may not align with the typical focus areas of grant programs, such as technology, health, or education.
In terms of securing a loan from a bank or attracting an investor, having a solid business plan is essential. This plan should include detailed financial projections, a market analysis, your unique selling proposition (what sets your contracting service apart), and an operations plan.
Demonstrating a thorough understanding of your target market and a clear path to profitability is crucial. Banks and investors look for a sound understanding of the business’s finances, including projected revenues, expenses, and cash flow. They also seek evidence of your commitment and ability to run the business successfully, which can be shown through your experience in contracting or related fields.
Regarding the percentage of the total startup budget you should contribute, it varies. Generally, having some skin in the game, typically around 20-30%, can be favorable as it demonstrates your commitment to the project.
However, it's not always necessary to have personal funds involved. If you can convincingly demonstrate the viability of your business and your ability to repay a loan, you may be able to secure funding without a personal financial contribution.
The timing of securing your funds is also important. Ideally, obtaining financing several months before launching your business — around 6 months is a good benchmark — allows you time to acquire necessary tools, establish contacts, and handle other pre-launch expenses. This timeframe also provides a buffer for any unforeseen challenges.
Finally, it's generally optimistic to expect to be cash flow positive from the first month of operations. Most new businesses take time to become profitable. Therefore, it's prudent to allocate a portion of your initial funding to cover operating expenses for the first few months. A common approach is to reserve about 20-25% of your total startup budget as working capital to manage cash flow until the business becomes self-sustaining.
You might also want to read our dedicated article related to the profitability of an independent contracting business.
How to use the financial plan for your independent contracting business?
Many independent contractors approach investors or banks with a disorganized and unclear presentation, often failing to effectively communicate their business's financial potential and operational plan.
If you are determined to launch and grow your independent contracting business, securing the necessary funding is a critical step. This requires gaining the trust and confidence of potential investors or lenders.
To achieve this, it's essential to present them with a professional business and financial plan.
We have crafted an easy-to-use financial plan, specially designed for the unique needs of independent contracting businesses. This plan includes financial projections for a three-year period.
Our financial plan covers all vital financial tables and ratios, such as the income statement, cash flow statement, break-even analysis, and a provisional balance sheet. It features pre-filled data, including a comprehensive list of typical expenses encountered in the contracting industry. You can adjust these figures to precisely match your specific project needs.
This financial plan is not only compatible with loan applications but also beginner-friendly, providing full guidance for those who may not have extensive financial knowledge. There’s no need to perform complex calculations or alter complicated spreadsheets. The process is streamlined: simply input your data into designated fields and select options from drop-down menus. We've simplified the financial planning process to ensure it's accessible to all, including entrepreneurs who might be unfamiliar with complex software like Excel.
In case you face any difficulties or have questions, our team is available to provide assistance and support, free of charge. We are committed to helping you make your independent contracting business a well-planned and financially sound venture.
The content provided here is for informational purposes only and does not imply endorsement. While we strive for accuracy, we do not guarantee the completeness or reliability of the information, including text, images, links, or other elements in this material. Following the advice or strategies presented here does not assure specific outcomes. For guidance tailored to your individual circumstances, it is recommended to consult with a professional, such as a lawyer, accountant, or business advisor.