How Scammers Could Defeat Your Time-In-Business Underwriting Requirements

The TIB checked out on the application and with the Secretary of State (SOS). The company had been in business for almost exactly five years—comfortably beyond the minimum underwriting guidelines. But its online footprint looked much weaker, almost as if the business had opened yesterday. Maybe it had. Or maybe the business did not actually exist at all, and the validated corporate records were simply part of a sophisticated fraud designed to slip past the gatekeepers.

But if something were really wrong, how could one explain the SOS-verified TIB?

“Ever heard of a Shelf Company?”

That was a question posed by Jamie Parker, CRO and co-founder of Heron Data.

A shelf company, or shelf corporation, is a legal entity that is formed, registered, and then placed “on the shelf” to age. At some point in the future, the entity may be sold, potentially allowing the buyer’s company to appear older than it actually is. Online forums such as Reddit, BiggerPockets, and CreditBoards contain years of discussion on the topic, including strategies, success stories, and failures.

According to Parker, there is a perception online that an older entity can provide a shortcut to obtaining business credit that a party might not otherwise qualify for. Anyone who follows the rabbit hole of shelf-company discussions will inevitably find websites that sell them.

Parker found himself on one such site. It listed the names of entities available for purchase along with their respective ages, and he became curious about what he could do with the information.

“I looked at that and so I went through all the archives, the Wayback Machine, I looked at all of the ones that had been sold in the last, like, five years,” Parker said.

He ran a test, searching Wayback Machine to determine which entities had been sold and whether any had later surfaced in the State courts as a defendant in a lawsuit with an MCA funder. He quickly found one: a business using a shelf entity that had received funding, defaulted, and was being publicly sued for breach of contract by three different funders.

“Time in Business, pretty much everyone has some policies,” Parker said. “The source of truth for Time in Business is considered to be the Secretary of State.”

Parker said that information alone may not be enough, given how freely advice about circumventing company-age requirements is proliferating online. It can be important to go one step further.

“So in the Secretary of State it will give you some information like when the business was formed, when control changed,” Parker said. “If whatever owner changed or the offices changed three months ago, that’s a flag. But you really have to get into the weeds for that.”

That is particularly true when underwriting teams perform every review manually. Parker noted that Heron’s technology can already retrieve that pertinent information as part of its system, however.

“…maybe you compare your Time-In-Business check with when the office has changed, and if the office has changed less than a year ago, that you’re probably not going to auto-decline, but you are going to want to just make sure that there hasn’t been like a significant change in control of the business,” he said.

Shelf companies are not a new phenomenon. In Parker’s view, however, the pace of underwriting in the small-business finance industry is rapidly approaching the speed of consumer lending. As automation begins to replace certain manual processes, seemingly minor tricks employed by applicants could derail the entire model.

For example, the buyer of a shelf corporation could use it to open a bank account and season that account with circular deposits and withdrawals over several months, creating the appearance of legitimate sales and expenses. In that scenario, there is a real legal entity with real bank statements, resulting in a more sophisticated form of fraud.

“You’re making faster and faster offers, you have less time for humans to look at stuff. This is the kind of thing that you’re going to get caught by,” Parker said.

In a social media post about the topic, Parker said, “Compare the transactions with the industry – if it’s a restaurant with only ATM deposits and checks, it merits further investigation. If you see lots of card deposits, that’s more likely to be safe. Look for signs of business activity – Facebook, Yelp, SAFER, whatever you would expect given the industry.”

Parker said Heron can automate those checks as well.

When it comes to company age, most scammers already understand that a corporation that does not exist—or one that was formed the night before—is unlikely to make it past the starting line.

“[Criminals] know funders care about Time In Business, they know funders care about revenue quality or whatever, and gaming that system,” Parker said. “So… you’ve got to be more proactive if you want to kind of keep up, because automation opens the door to more of this fraud.”

Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.