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Twisted American Dream: Study shows microloans aid predatory MLMs

(ENTREPRENEUR) If microloans are being given to start new businesses, let’s give to those who are starting their own businesses rather than MLMs.

MLMs twisting the American Dream with microloans. Image of the American dollar with collage background.

Microloans were touted as a way to help people in poverty to find a way out. Yes, the interest rates were higher, 15% – 18% for some micro-lenders, but not as high as payday loan businesses where loan interests can soar to upwards of 400%.

When you live life on the edge of financial failure, microloans are supposed to offer a helping hand to those starting their own businesses.

Enter today’s flourishing MLM market, where participants are promised if they work hard and follow the plan, they can make their way to the top of MLM glory with its promises of riches, cars, cruise vacations, and more.

Microloan companies classify MLMs as small businesses and offer loans to those who can’t use cash as collateral with their own banks to secure loans. These microloans are used to buy MLM inventory and a dream.

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Grameen America is one microloan company that allows MLM inventory purchases as part of their business loan program.

“Grameen America does not advise members about their business choice or refuse loans based on business type as long as borrowers can prove their funds are being used for business purposes and the business is legal,” Grameen America told Vox reporter Kelsey Piper in an interview for a May 18 story.

“It is our experience that our members know how best to put their business loans to use and the type of business they believe will be successful for them. Our data shows many members start off in one kind of business, e.g. direct sales, and then pivot into other types of businesses as they cycle through our program.”

According to a Grameen America study, women who took out these microloans saw a positive but modest increase in monthly net income, a small increase in savings and a Vantage-Score (a type of credit score).

Their study shows that 32.7% of their customers plan on starting or have started their direct sales or MLM investment.

The company does not differentiate the overall income success of entrepreneurs who start their own businesses from those who invest in MLMs so measuring the difference in success there is not possible. However, an AARP Foundation study found that 44% of participants dropped out after less than one year of working with an MLM.

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With a loan interest rate of 15% – 18% for a microloan, failure could lead women in poverty to an even worse situation than where they started.

The microloan business is not new, and the results are not hidden. As investigative stories showed in 2016, microloans aren’t lifting women out of poverty.

Encouraging women in poverty to use the loans to buy inventory in an MLM is bad business for everyone. Financial experts and even some MLM companies make it clear going into debt to join an MLM is strongly discouraged. Microloans don’t change financial fundamentals.

The Grameen America study does show positives for the women who serve as their customer base. The study stated, “Overall, the study found it was not just increased income or just the loan that led to the program’s positive effects. The weight of the evidence suggests that women who experience life circumstances similar to those in the Grameen America program are likely to be more financially resilient in the face of unexpected challenges if they are offered more options to combine work and businesses, more ways to strengthen their peer networks, and more liquidity.”

That might be true, but with an over 40% failure rate for those investing in MLMs, the risk might not be worth it.

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Mary Beth Lee retired from teaching in Texas this year after 28 years as a student media adviser. She spends her time these days reading, writing, fighting for public education and enjoying the empty nester life in Downtown Fort Worth.

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