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Being your own boss
There's no upper limit -- or lower, alas -- to how far you can go being self-employed.
April 15, 2005: 2:27 PM EDT
By David Futrelle, Jon Birger, Pat Regnier, MONEY Magazine
Getting rich in America
Working for yourself works
People who run their own businesses (and survive) tend to build wealth faster than employees do.

Average household net worth:

Source:Federal Reserve Study of Consumer Finances, 2001

NEW YORK (MONEY Magazine) - "The thing about being self-employed," says Thomas Stanley, co-author of "The Millionaire Next Door," "is that there's no upper limit."

According to the Federal Reserve Board, between 1992 and 2001 the average net worth of self-employed people rose from $714,500 to $1.2 million, five times that of the average working stiff. Given that eye-popping differential, is there any reason not to quit your day job and get cracking on that business plan?

For starters, there's not much in the way of a downward limit for the self-employed either. About one out of three businesses fail within four years, according to the Small Business Administration's Office of Advocacy. And a business crisis can all too easily translate into a personal one. One study found that about 20 percent of people filing for personal bankruptcy claimed some business debts.

That's because starting a business very often requires -- surprise -- leverage. The SBA says that about 80 percent of all small businesses have some kind of debt on their books.

The good news is that, as with real estate investors, would-be entrepreneurs have remarkably easy access to other people's money these days.

In February, members of the National Federation of Independent Business reported that they paid an average rate of 6.7 percent for short-term loans vs. 10.1 percent just four years ago. The long slide in interest rates has gone hand in hand with a blossoming of small enterprise. There were, for example, nearly 3 million more sole proprietorships in the U.S. in 2003 than in 1993.

Some businesses still have trouble getting outside financing, however -- particularly those starting from scratch. Owners often have to throw in a lot of their own resources and put their own credit on the line.

That can be a heady gamble. Just ask former manicurist Rosie Herman of Tomball, Texas. She developed her One Minute Manicure line of hand and nail treatments after she went $75,000 into debt paying for fertility treatments. After putting her twin girls to bed, she'd stay up at night experimenting.

"I never planned this to last," she says. "I just wanted to get out of debt."

To do that,though, she went further into debt, funding her business with as many credit cards as she could get.

"I kept applying for more credit cards, getting $1,500 credit on each," she says. She even rang up $10,000 buying supplies on her sister's credit cards.

That's a gut-wrenching level of risk most people wouldn't -- and probably shouldn't -- be willing to take. But funding a business with plastic is common enough among small businesses. The SBA says that about 44 percent of small businesses in 1998 were borrowing from personal credit cards.

Risk can be a heck of a motivator. "I was under stress knowing I was in debt, and I was making it worse and spending money every day," says Herman. "I had to do something to make the sales."

She went to stores and beauty parlors trying to convince them to buy her stuff. Often, she says, they slammed the door in her face. But she pressed on.

"I created the demand by going around and making people try it, making my own buzz," she says. Result: Over the past five years, she's done about $20 million in sales.

If you have good credit and a solid business plan, your own start-up might not be as harrowing as Herman's was. But remember, no matter how hard or easy it is to borrow, the odds on any new business are always long.

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