Small businesses often face a lot of scrutiny when they try to get loans from banks. Banks often want to see several years of credit activity showing that the business handles its finances well. Without that credit history, it is much more difficult to secure a loan. Some business owners try to get around this requirement by purchasing a shelf corporation. While this could help you access the credit that you need, there are high risks that make it inadvisable.
What Is a Shelf Corporation?
A shelf corporation is a business that has been formed on paper, but does not actually exist in the world. These companies are “aged” or “put on the shelf” for several years so that they look like they have long histories when, in reality, they have not done anything at all. The best shelf corporation sellers will use transactions between their companies to make it look like they have pristine credit histories. Dun & Bradstreet requires several transactions a month for at least a year before it will give companies a credit score. Shelf corporations, therefore, can get pristine credit histories even though they have not really done anything except pass money back and forth.
What Are the Advantages of Buying a Shelf Corporation?
Buying a shelf corporation can make it much easier to qualify for a loan, especially if you apply for less than $150,000. Most banks do not perform extensive investigations for loan amounts less than that, so they might not ever discover the deceit. You also benefit from a lack of responsibility. If you default on the loan, you could theoretically walk away from your corporation without losing much.
Are Shelf Corporations a Good Idea?
It is unclear whether it is legal to use shelf corporations to access credit. It is clear, however, that this is a deceitful, unethical maneuver that serious entrepreneurs should avoid. When banks reject loan applications for businesses, they do so because they are not sure the borrower can repay the money. A new business owner is a high risk, so banks usually turn down their applications. The problem is that many new business owners prove the banks right by defaulting on their loans. Just because you buy a shelf corporation does not mean that you know how to handle a business’s finances properly. You could quickly find that you owe a lot of money that you cannot repay.
Letting the loan default is not a good answer to this problem. Banks can try to sue you to get their money back. A mark on your record could also mean that banks continue to reject you. If a lender finds out that you tried to trick another lending institution with a shelf corporation, then you can forget about getting a loan.
Shelf corporations are also expensive. Many shelf corporation sellers charge 20 percent of the loan amount. That means business owners pay thousands of dollars for them and they do not even get to access the full amount of the loan.