- 1A shelf company is an aged legal entity that can be bought to make a business look older than it is.
- 2Heron Data's Jamie Parker found one such entity sued by three funders for breach of contract.
- 3He advises checking ownership and office changes, deposit patterns and online business activity.
An application can pass a time-in-business check and still be fraudulent. In the scenario that opens this story, a company had been in business for almost exactly five years, well past minimum underwriting guidelines, and the Secretary of State record confirmed it. Yet its online footprint was thin, as though it had opened yesterday.
The explanation, according to Jamie Parker, CRO and co-founder of Heron Data, may be a shelf company.
What a shelf company is
A shelf corporation is a legal entity that is formed, registered and left to age. It can later be sold so the buyer's business looks older than it is. Reddit, BiggerPockets and CreditBoards have years of discussion about the tactic, and following it leads to sites that sell such entities. Parker says there is a perception online that an older entity is a shortcut to business credit a buyer would not otherwise get.
Parker found one such site listing entities for sale with their ages. He went through archives and the Wayback Machine for entities sold in the past five years, then looked for any that later turned up as defendants in state court suits brought by MCA funders. He found one quickly: a business using a shelf entity had received funding, defaulted and was being sued publicly for breach of contract by three funders.
Why the Secretary of State is not enough
Most funders treat the Secretary of State as the source of truth for time in business. Parker says that is not sufficient when advice on getting around company-age rules circulates so freely. Underwriters can look further: the record shows when the business was formed and when control changed, and an ownership or office change a few months ago is a flag.
Parker's suggestion is to compare the time-in-business check with when the office changed. If it changed less than a year ago, he would not auto-decline, but would check for a significant change of control. Manual underwriting teams find this hard to do consistently, he says, and Heron's technology can pull the information automatically.
Faster underwriting, new exposure
Shelf companies are not new, Parker says, but small business underwriting is approaching the speed of consumer lending. As automation replaces manual steps, small tricks can break the model. A buyer could open a bank account in a shelf entity and season it for months with circular deposits and withdrawals, producing a real entity with real statements and a more sophisticated fraud. "You're making faster and faster offers, you have less time for humans to look at stuff," Parker said.
In a social media post, he advised comparing transactions with the industry: a restaurant with only ATM deposits and checks warrants a closer look, while many card deposits are more likely safe. He also suggested looking for signs of activity such as Facebook, Yelp or SAFER listings. Heron can automate these checks as well, he said.
Most scammers already know a nonexistent company, or one formed the night before, will not get far. They understand that funders care about time in business and revenue quality, Parker says, and they game both. Funders have to be more proactive, he argues, because automation opens the door to more of this fraud.
Source reporting: deBanked.
