I assume you'll be using Mac OS X on the iBook. I've had very little Linux-on-iBook experience and so would rather not comment on that.
The 12" screen is decent for basic word -- typing documents, surfing the web, file management, and the like because of the 1024x768 resolution. You might find the text a bit too small for your taste, so I suggest you go look at an iBook 12" up close first and compare it to an iBook 14" too see which better suits your eyes. Some find the 12" nice and sharp, but others find it more comfortable at 14".
However, if you're involved with multi-window work (say, coding) or you need a larger real estate, an external monitor is a must (17" bare minimum, 19"/12" preferrably). I know some people who are web designers that consider an external monitor a must-have.
The iBook G4s, as reported by XLR8YourMac, can use the OF hack that allows dual-display support. Of course, these are taken at "your own risks", so if something goes bad, just hope that technical support is forgiving.
Modifications to the software are unsupported by Apple, but it doesn't exactly void your warranty. For example, installing Linux on your Mac doesn't void your warranty (but don't expect to get suport from Apple). If I recall correctly, there's a "temporary" patch and a "permanent" patch. If its in software, there's always some way to revert it to the way it was originally. This isn't always the case with hardware.
As for fink, it's a wonderful project and I use several ported apps all the time!
I prefer the GNU-versions of certain programs (fileutils such as ls and rm). But I've also downloaded links, fetchmail, and other apps. I only occasionally use Gimp (I use GraphicConverter more), and it runs pretty swell on my G4/400, so the iBook G4/800 would definitely run it without problems.
Since you mentioned web programming, I'm guessing you'd probably be doing PHP kind of work. If you spend more time with the code, you might want to consider hooking up to an external monitor if you have several windows open.