While in graduate school, June Smith* worried about the student loans she’d have to repay after graduation. But after a friend hosted a party selling nail art supplies, she thought she had found a solution to make some extra cash.
At the end of the party, a sales leader explained to June how to sign up and become a nail wrap consultant and sell the product herself. “I confessed that I was anxious and I sucked at sales,” said June. “But they were still encouraging [that I move forward].”
Convinced, she completed the signup process and invested approximately $300 for the startup kit, business cards, and other supplies. She would later invest an additional $3,000.
Though she earned small amounts of money, it wasn’t until June sat down and compared her investments to her earnings that she realized she was losing money at a rapid pace.
“It was a money pit,” June says.
June isn’t alone in her experience. According to the Federal Trade Commission (FTC), less than 1 percent of multi-level marketing (MLM) consultants make a profit. Many people dream of being part of the small minority, but it’s important to know about the dangers of MLMs before investing your hard-earned money.
What is an MLM business?
“Multi-level marketing” and “pyramid scheme” are often used interchangeably, but they’re not the same thing.
The Better Business Bureau defines MLMs, also known as network marketing, as a system of selling products in which the company doesn’t have retail stores. Instead, businesses rely on a network of independent salespeople to sell products. Some popular MLMs you may have heard of include Scentsy, Herbalife, and Pampered Chef.
Salespeople purchase inventory from the company and sell it at a markup to their own customers. Most sell on social media, though some hold live sales, too.
What differentiates MLMs from other types of retailers is that salespeople can make more money by recruiting and training other sales consultants. If they recruit another independent consultant, they can make a commission off the new person’s sales.
Pyramid schemes, however, primarily work by promising big profits for recruiting other members. There’s little to no mention of selling an actual product to consumers; instead, it’s all about building the network.
Pyramid schemes are illegal, but MLMs are not. MLMs can sometimes fall into a gray area, however. Some businesses have received penalties and restrictions from the FTC when they have too closely resembled pyramid schemes.
The dangers of multi-level marketing companies
Many multi-level marketing companies advertise themselves as a dream job for those looking for flexible work or a reliable side hustle. According to them, you can earn a full-time income working just a few hours a week, set your own schedule by working from home, and easily sell the products to your network.
The reality can be much more difficult. These are the five biggest dangers to keep in mind before signing up with an MLM company.
1. Startup costs are expensive
When Shannon Wilt* signed up as a consultant with a clothing company, she spent thousands just to get her business off the ground.
“In the beginning, I ordered supplies, the initial onboarding kit, and I wanted to carry some additional styles at the time to set myself apart from all the other people who were just joining,” Shannon said. “I put about $13,000 on a credit card at the time. However, this was also not unheard of or crazy at that time [with the company].”
Whether you want to sell candles, essential oils, skincare products, or energy drinks, you likely can’t just sign up with a company and start selling. Most companies require you to spend hundreds or thousands to become a consultant.
Beyond an initial membership fee, you have to purchase inventory, create a website, and market your business, all of which adds to startup costs. Some people rely on their savings, credit cards, or even business loans to get started, sticking them with major debt before they’ve earned a dollar.
2. You might alienate friends, family, and acquaintances
If you spend time on Facebook or Instagram, you’ve probably seen plenty of posts from sellers touting the benefits of one product or another. That’s because many MLM companies recommend tapping into your personal network of friends and family.
Repeatedly tapping into that network can strain your relationships, or even cause your loved ones to avoid your messages or block your social media posts altogether. Once you’ve exhausted the goodwill of those you know, trying to build a new clientele from strangers can be difficult.
3. You could be encouraged to buy more inventory
In interviews with consultants from various companies, there was one common theme, regardless of product: When they struggled to make money and turned to the company for help, they were encouraged to buy more inventory.
“They told me [I wasn’t selling] because I didn’t have enough in stock,” Karen Bond* said. “They recommended I use a low-interest credit card to buy another $5,000 of merchandise to improve my business.”
Although some consultants say that sales did pick up with more options in stock, others said it didn’t make any difference. Instead, they had more credit card debt and even more inventory they couldn’t sell.
4. To make big money, you need to recruit
You can make money by selling products directly to customers. However, your profit margins might be slim.
For example, an advanced consultant selling Pure Romance products gets a 40 percent discount off the retail price on merchandise to sell. However, an executive director — the top tier of sellers who’ve recruited at least 30 other consultants to work for the company — gets a 60 percent discount.
That means they make more money off each sale. Moreover, they also earn up to 6 percent commission on sales the consultants under them make.
To boost your profits and overall income, recruiting others downline is essential.
5. Getting a refund might be impossible
Some companies allow sellers a chance to send back unused, unopened products for a full or partial refund. However, return policies vary from company to company and can change at any time.
For example, clothing company LuLaRoe previously allowed sales consultants to return unsold products for a full refund, reported Inc. However, the company abruptly changed that policy; sellers can now only get a 90 percent refund and are responsible for shipping costs.
The company can also decide to not issue refunds for certain products, such as seasonal prints — a change that can leave many sellers unexpectedly in the red.
Alternatives to MLMs to make money
Selling multi-level marketing products might sound like the perfect way to make a sizeable income while balancing other obligations. However, making an investment into a multi-level marketing company is a big decision. If you aren’t successful, you could lose thousands with no recourse.
If you’re looking for legitimate ways to make money without emptying your savings or using a credit card, you can launch one of these side hustles with little or no upfront investment.
*The consultants named in this piece asked to remain anonymous due to concerns about company retaliation.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for SoFi.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.50% APR (with Auto Pay) to 7.27% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 17, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/17/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.
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3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.49% effective March 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.50% – 7.27%1||Undergrad & Graduate|
|2.50% – 7.12%3||Undergrad & Graduate|
|2.81% – 8.79%4||Undergrad & Graduate|
|2.50% – 6.65%2||Undergrad & Graduate|
|2.55% – 7.12%5||Undergrad & Graduate|
|3.00% – 9.74%6||Undergrad & Graduate|