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Droves of people are jumping on the opportunity to be their own boss and make an income without having to punch a clock. One business that's booming is network marketing. Network marketing, or multi-level marketing, has been around a while and includes some well-known companies like Avon and Tupperware. It's also a popular business model among many small businesses. But because some of the companies that use this business model are not so small, the government recently took action to protect consumers and ensure they're getting a fair deal.
Network Marketing is Different From Employee-Paid Leads
If you're thinking about getting into network marketing yourself, you may be wondering if it's different from selling products to your friends and family, or selling them to people through an online website or store. There are definitely some differences between these two approaches. An MLM recruiter might encourage you to recruit a friend into your upline so that both of you make money, for example. That would be the same thing as asking a friend to buy something from you online.
Network marketing is similar to selling a product through a store. For example, if you sell vitamins through an MLM company and your customers ask that you make a special deal for their friends, that's both similar to and different from selling them at a store yourself. Legally, both of these actions are considered direct sales. If you're selling products through an MLM company, your sales are considered direct (not indirect like your friend's deal) because you're predicating income on the fact that people will pay you directly for what they buy (not receive it free from the company in exchange for their own personal use).
Network Marketing: The Definition
To know whether you're acting in an MLM capacity, start by looking at the definition of multi-level marketing. According to the FTC's definition, multi-level marketing is "an unfair or deceptive plan compensation system in which participants pay to promote products and services directly to the public." The FTC also states that businesses involved in this kind of marketing are required to disclose whether they belong to a legitimate multi-level marketing company or not.
What About Direct Sales?
In direct sales, people do not sell their own inventory. Instead, they receive money for their own product (typically in exchange for a commission on each sale). They can then use that money to buy inventory, which they can then sell on to others. Regulations regarding this type of sales vary around the country. In some states, you don't need a license at all if you are only selling with friends and family; in others, you do.
Who Can Join Network Marketing?
This business model is open to anyone 18 years or older who has been depending on social security income for their entire working life and does not expect to make more than $50k per year (this amount is for someone who doesn't have any form of expense or debt to offset). Your MLM business must be legitimate, which means that it must adhere to the FTC's regulations set forth above. If a business fails to adhere to those regulations, it is not considered legitimate and may be investigated by the government.
What Is a Margin Loan?
A margin loan is when a business loaned you money to buy inventory. The more you sell, the more money you earn. It's important for you to understand that if your "business" makes more than $50k/year net after expenses from other sources (savings, investments and other income), that means there's nothing left in the wallet for a margin loan. While most people's first reaction on getting a margin loan is that the lender is ripping them off for giving them cash without their business making profits, this isn't true. The lender did their homework on your business and believes in you, otherwise they wouldn't loan you money.
For a bit more clarification on exactly what a margin loan is, here is an example. Let's say you want to buy $20k of inventory but your credit card/savings only has $10k available. A person could loan you the extra $10k as a "margin loan". You promise to pay them back, with interest, within the next few months. If your business only makes $5k net after expenses during those few months, it means there is nothing left over to pay back the margin loan. If you aren't making money at your business, the business will lose money and the lender is taking a risk. Some lenders may do this because they believe in the business and want to invest in it, which is more than most venture capitalists will do. But if the business hasn't made enough to cover the loan, they may demand that you pay it back before they give you any more money. This isn't illegal but can be unwise. You should never take an additional loan or advance based on your inability to pay back an existing one as soon as possible.
If your business has made more money than the amount of your loan, you must pay back your interest on the loan before you get to keep the profits. This can be a good way to get some extra cash if your margin loan is within 50% of inventory value.
Be careful with getting a margin loan. If you didn't have this money available to you in the first place, how will you be able to use it to pay back a margin loan? If possible, find another source of funding for any inventory purchases and only get a margin loan for things like advertising or office supplies. It's also easy to overestimate how much inventory you need. Some people think they need to buy like $500,000 of inventory to make a legitimate MLM company and only use $30k. You can be sure that some lenders will want to know your exact figures before giving you any money.
What is Network Marketing?
Network marketing is an "as seen on TV" style business, similar to multi-level marketing but even more cutthroat. In network marketing, prices paid by salespeople are much higher, in order to compensate for the substantial amount of up-front and ongoing expenses needed to run the business. Network marketers sell products directly from their homes or businesses without any input from retail store shelves, interview with prospective customers or customer reviews (all traditional methods of direct selling). In essence, direct sales people (network marketing reps) are paid on a "per sale" basis for whatever products/services they sell to their customers.
Companies usually have a long-term deal with the promoter. In order to be successful, the promoter must recruit a group of people that are interested in the company's product or service. The promoters will then often sponsor parties at their own homes or shops in order to sell their product directly to potential customers. Some promoters will keep track of sales made by their representatives and offer commissions on any sales generated through this process.
Conclusion
Multi-level marketing is extremely controversial. Many believe it is the most unfair and deceptive form of marketing that exists today. The main reason why this business model is so controversial is due to the fact that some companies use it to sell products that are not all they are made out to be by their distributors. They use this business model in order to trick consumers into buying their products under the guise of being able to make money as well, when in reality, they will lose money with these types of "businesses."
A legitimate multi-level marketing company will tell you how much you can expect to make.