Business Scams

Prevalence

Throughout the United States, thousands of individuals are starting home-based businesses every day. The Small Business Administration estimates that more than half of all U.S. small firms are home-based businesses.

Because of the growing interest in home-based business, a large number of individuals and companies have organized to meet the needs of budding entrepreneurs. Many of these are legitimate companies, however, many are simply interested in promoting a scheme. While such schemes are not new, the use of telecommunications has provided the means for new business opportunity scams to develop over the past few years The main targets of work-at-home schemes are people with young children at home, the elderly, the unemployed and individuals with disabilities. Fees for work-at-home schemes range from $5 to $30 on the low side, to more than $30,000 on the high side.

Types of scams

Two holdover schemes we have seen over the years involve envelope stuffing/mailing services and assembly/craft work. Typically, when someone responds to an ad for envelope stuffing, all they receive for their investment are instructions to place a similar ad. Think about it. With modern equipment and mailing techniques, there is really no demand for workers to stuff envelopes in their homes. Assembly/craft work are also frequently advertised opportunities. These often require an investment in equipment or supplies. When the investor completes the work, they often find that they are expected to sell the finished goods on their own or they are told that the workmanship is not up to "standard." Unfortunately, no work is ever "up to standard."

"Business opportunities" which have become popular recently include products and services such as the sale of business and trading cards, medical billing, website design and hosting, vending machines, Internet marketing and prepaid phone cards. The Federal Trade Commission has investigated many of these opportunities. Often the violation which is cited involves the "misrepresentation that purchasers could reasonably expect to achieve a specific level of earnings." You can easily access cases the FTC has investigated.

A number of companies travel throughout the United States selling home-based business "opportunities" such as the sale of distressed merchandise, discount travel memberships, T-shirts, vitamins or scholarship search services. They usually sell the opportunity for a special price only at the time of the seminar and they are almost always are from out of state. Federal Trade Commission investigations suggest that "few, if any, consumers who purchase the business ventures make any substantial money."

In the past six years the Federal Trade Commission (FTC) has taken law enforcement actions against more than 200 business opportunity schemes. It is estimated by the FTC that losses due to these scams are conservatively valued at $200 billion per year. The lost per investor averages between $5,000 and $10,000.

Evaluating a "business opportunity"

An individual looking at a home-based business opportunity should ask the following questions before moving forward:

• Does this offer sound too good to be true?
• Am I being pressured to buy today? Can I afford to lose my investment?
• What do I really know about this individual or company?
• If any of the answers to these questions are negative; buyer beware!
  

The Federal Trade commission has developed these seven basic precautions:

• Study the required disclosure statement and proposed contracts carefully.
• Consult with an attorney or other professional advisors before making a binding commitment.
• Be sure all promises made by the seller are written into a contract.
• Talk with others who have already invested in the business.
• Investigate all earnings claims carefully and insist that earning claims be in writing.
• Comparison shop other franchises or business opportunities.
• Request information from consumer protection agencies and the Better Business Bureau in your area.
  

Recourse

If you have invested money in a company that you feel is not legitimate, contact the company and request a refund. If they refuse, you can seek assistance from the following agencies: the Attorney General's office in your state or the state where the company is located; the Better Business Bureau; the U.S. Postal Service; the manager of the publication that ran the ad or any other local consumer protection offices. For more information, visit the Federal Trade Commission web site at www.ftc.gov or the U.S. Postal Inspection Service web site at postalinspectors.uspis.gov.

To learn more about home-based businesses, download How to Start and Manage a Home-based Business. For personalized assistance, contact a business specialist at a Small Business & Technology Development Center. Visit our calendar of events for a listing of business training events in Missouri.

- Barbara Cunningham, former business specialist, SBTDC