Small business owners finding it difficult to qualify for loans and lines of credit are applying for loans from behind the façade of shelf corporations. The Better Business Bureau advises small business owners that, as tempting as these schemes sound, using a shelf company to misrepresent your credit worthiness to a bank can be considered loan fraud.
The term “shell company” generally refers to a limited liability company and other business entity with no significant assets or ongoing business activities. The term “shelf company” refers to a shell company that is created and maintains little or no activity — or put on the “shelf” to season. The shelf company can then be sold to someone wishing to start a company without going through steps to create a new one.
Companies that create and sell shelf corporations often tell buyers they can use the creditworthiness and business history of the shelf company to obtain credit for their business. The companies also recommend that buyers exploit the age of the shelf company to get government contracts, which usually have requirements for how long the company has been in business.
While the scheme may be tempting, the possible outcomes far outweigh the potential benefit. Many banks are increasingly stringent when handing out loans and will likely require a personal guarantee. Since the scheme doesn’t actually increase the business’ creditworthiness, the bank could come after the owner’s personal assets if he or she defaults on the loan. In the worst-case scenario, the small business owner could be found guilty of loan fraud, face penalties and be required to pay the money back.
One business selling shelf corporations to struggling business owners came to the attention of the BBB serving Northeast California. The business was selling shelf companies for $7,500 upfront or 20 percent of the loan received. Potential borrowers were advised to request a line of credit below $150,000. The business recommended which banks the borrower should apply to and promised that the borrower will not have to provide business or personal financial statements, income tax returns or personal guarantees, and that the lending financial institution will not pull a personal credit report.
A BBB representative spoke with the owner of the company who admitted that he had 60 other salesmen working across the country selling shelf companies and the secrets to his method for deceiving banks. The BBB spoke with business owners who attested that they had a difficult time getting loans for their small business but successfully received loans under the identity of the shelf corporation.
Instead of resorting to deceptive tactics to get a loan, your BBB advises small business owners to learn more about the Small Business Administration’s new America’s Recovery Capital program that provides no-interest, deferred-payment bridge loans to struggling businesses. Information is available online at
www.sba.gov/recovery/arcloanprogram.