Although your post didn’t mention how many distributors he’s using, I’ll assume that most of his sales are for just one or two. If he is charging the cost of goods to his AMEX before he has collected from the distributor (which is likely), he faces the chance that a distributor won’t pay up at the end of the month for some reason. Add to this that AMEX requires you to pay off the full balance every month, and your friend could be left holding a bill totaling in the several hundreds of thousands of dollars.

It’s also likely that your friend has no clue as to the financial stability of his distributors, which means that any of them could go bankrupt at any moment to his great surprise. Even if your friend was a millionaire, he would have a tough time absorbing a $400,000 loss without it disrupting his life pretty significantly.

Now you might say, “He could sue them if they don’t pay.” Well, that doesn’t change the fact that AMEX is going to want their money at the end month. Can’t pay? AMEX will sue you. Claim bankruptcy? You’re still going to have to pay it under the new consumer debt B.K. laws.

Even it you do sue the distributor, lawsuits can take years and that’s if you can even get them into court. Hope he can afford the legal costs. Distributor in a different state? Oh, now you are going to have to deal with interstate commerce laws and travel expenses.

This is why most businesses must operate on much higher profit margins. Otherwise, it’s just a recipe for disaster if you don’t have a stockpile of cash to hedge the risk.

People should keep in mind that something like this is really risky. With such small profit margins and such huge costs, imagine a situation where it costs $900 (instead of $450) to get a new sale for the span of a month. He’s essentially lost a good percentage of his profit. It’s just one example of the many things that a lot can go wrong with low profit margin.

Chad Timothy