Today’s blog is about a very negative side of corporate finance. One of the ways to finance your business is by borrowing money from a bank, but sometimes small businesses have trouble on getting them. Especially in times like these, with the crisis going on, it’s not hard to imagine that small - business owners would seek help in more desperate measures.
The article I read was about ‘shelf corporations’. A shelf corporation is a “(...) business entity that has no real assets or ongoing business activities, what is called a shell corporation, that is then “put on a shelf” for a few years while credit history is established (...)” (source)In the past, they were used to built up a new company, but now they are being abused to find a way to cheat on credit guidelines. The president of Better Business Bureaus (BBB) of South California, Doug Broten, gave an interview in the article about the research he did concerning these frauds, after a man that was involved in shelf corporation – scams had to answer to the appeals committee of BBB and the FBI.
Sometimes when a small company hasn’t got the credit history required to get a loan, they seek help on the internet. There, a whole lot of these shelf companies offer the client to use their ‘shelf company’ and especially its credit history to get a loan. These shelf companies make sure they have done enough transactions to look like a creditworthy company, without being a real company.
The president of BBB said it was difficult for banks to recognise this scam when confronted with it, because the shelf companies mostly tell their clients exactly what banks they should go to and that they should never ask for more than $ 150,000. When this amount or less is borrowed, banks normally don’t investigate the transaction.
When things turn out bad and loans aren’t paid back, banks have nothing and no one to go after. This is bad for the bank, but also for the bank’s customers whose money is involved. The small – business owner often get hurt themselves. The owners of the shelf companies ask for advances and once paid, they are never heard from again.
This practice is called unethical, but there is not yet a law that really forbids this practice.
This article highlights such a different way of corporate finance, or rather the lack of it. I agree with the president of BBB that there has to be a different way to finance your business when banks don’t want to give you any loans because they don’t find you creditworthy enough. Yes, even putting aside the idea of having your own business.
Myself, I would really like to have my own business when I am a bit older and experienced, but to be quite honest, I would never surf the internet ‘for money’ and get involved in such scams. If I wasn’t creditworthy enough to get a loan, I suppose I would first try to find some investors in my family or among business relations, etc. Or even, worst case scenario, close the doors of my company. I firmly believe that getting involved in this can turn out ten times worse than closing your doors in a neat and honest way.
Until next week for a new blog on corporate finance!
Kind regards, Lien Vanneder
Source: http://www.businessweek.com/smallbiz/content/jul2009/sb20090714_626511.htm
Abonneren op:
Reacties posten (Atom)
Hey Lien,
BeantwoordenVerwijderenI think that's a very good article.
A agree with you saying that if you aren’t creditworthy enough to get a loan, that you would look for investors and alternatives.
But on the other hand, I think that the government should stimulate new companies more and help them to find investors or loans or give them more subsidies so that they are more creditworthy and that they can start their business or keep their business running. There should be more alternatives to motivate the companies but of course, it shouldn’t be too easy because that’s also risky.
Greet
Livine
First of all, it’s certainly true that your article is about a different way of corporate finance. Your blog is well structured and it reads very fluent.
BeantwoordenVerwijderenI had never heard before of these shelf corporations. I can imagine that the owners of small businesses have problems to get a loan during the current economic crisis. Banks have to be careful and sceptical to grant loans. I can also believe that some people become desperate when they can’t get a loan and they start to look for a shelf corporation on the internet that can help them getting a loan.
But I certainly agree with you that this is not the right thing to do. Getting involved in scams is indeed much worse than closing your business. On the other hand, I can understand in a way that when you are really desperate to save your company you are prepared to take illegal actions. What I think is worst of all is that certain people set up these shelf corporations. I believe that these people should be punished very hard.
Greet Annelies