It's often tempting for an entrepaneur or small business to try to supplement their income by engaging in a different activity "on the side." Be wary of these types of enterprises in which you might lose money and might even be put at legal risk.
Want to Make Some Money?
Are you looking in the classified advertisement section for a business opportunity? Often you can recognize them by these common first line advertisements:
- "Own Your Own Business"
- "Vending Route for Sale"
- "Pay Phone Route"
- "Be Your Own Boss"
- "Make $1,200 Per Week"
These types of ads not only appear in the business opportunity section of the classifieds, but often appear in the retail section as well as the sports section of the newspaper. These investments can be risky. Investors often lose their life savings when they respond to these ads and invest in the business opportunity offered.
Problems with business opportunities
Individuals who invest in business opportunities, especially those involving vending routes, may experience many problems. Once the investment is made, they may not receive the machines from the vending distributor as promised, or they may find themselves with faulty, poor quality vending machines which are easily broken into and which are located in nonprofitable locations. Investors often have trouble with the "locators" who, for a fee, are suppose to help the investor place the vending machines (or pay phones, etc.) in profitable locations. The locations are often poor profit areas and some machines may even be placed at a business without its authorization. These machines are often removed without the investor being notified.
Investors in business opportunities are often misled to believe that the business is highly profitable, when in fact, profits are seldom realized. Also, investors often find that the business opportunity promoter is unresponsive to complaints and may even go out of business before problems are resolved.
More information on Kentucky laws for business opportunities.
More information on the FTC's Franchise Rule.
Pyramids are multi-level marketing plans that focus on recruitment of members rather than the sales of products or services. In their simplest forms, pyramids are simply chain letter schemes where each person down the line sends money to participants up the line. Income for those up the line grows exponentially but the vast majority located down the line lose their entire investment. The plan becomes mathematically doomed to fail because there only a limited number of people in the world or in the market.
Today's pyramids are often more sophisticated. Schemes will usually involve a product to be sold but this is deceiving because the real money comes in recruiting members, not in selling product. Thus, nobody sells the product -- they recruit members.
Credit card laundering
Have you ever seen something like this ad?
This practice is known as credit card laundering or credit card factoring. You agree to process another company's credit card transactions in exchange for a fee because the other company does not have a credit card merchant account with a bank or credit card company.
There are several problems you face in this type of arrangement:
- You are essentially extending an unlimited, unsecured line of credit to a company that could not obtain its own account from a bank or credit card company.
- The other company may sell shoddy or non-existent goods or services, leaving you to cope with the charge backs.
- This arrangement is normally a violation of your agreement with the bank or credit card company with which you have your merchant account.
- This practice is illegal under the FTC's telemarketing rules and is a criminal violation in some states.
Don't fall for tales that the company is new and cannot get a line of credit or that the bank is too nosy and wants too much information!