Money Buzz 10/03

Do You Rate?
The continued weak economy has hit small businesses hardest, and many have struggled to keep their credit ratings intact. But experts say that even in a downturn, you can do simple things to avoid bad credit.

For one, you should regularly review your credit report, a seemingly easy task, but one many businesspeople fail to do. You can also sell noncore assets, a move that demonstrates to lenders a commitment to pay bills. What's more, experts say, you should be proactive with your vendors. If vendors are not paid on time, they might call your banker, causing your credit rating to slip. Instead, call the vendors first, and notify them of any potential missed payments-they might be willing to skip calling the banker. Later, when cash flow improves, reward these vendors by paying them early.

Finally, if at all possible, stay away from credit cards as a means of financing your business. According to Robert D. Manning, the author of Credit Card Nation (Basic Books), nearly 50 percent of small businesses use credit card debt to build capital, but the cost of borrowing off credit card debt has risen sharply over the past decade.

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Wherefore Art Thou Board Member?
Once a cushy job, serving on boards is now fraught with risks and is more time-consuming than ever. Shareholder lawsuits are on the rise, and directors can be held personally liable and financially responsible for court costs as well as cash settlements and judgments. Factor in more stringent oversight requirements that have board members serving up to 200 hours annually, and the job starts to seem like more trouble than it's worth.

How does a small company woo top-notch talent to its boards? A rock-solid directors and officers (D&O) insurance policy and an open attitude help reassure potential candidates, says Bruce E. Beebe, editor of Directorship, a newsletter published by executive search and management consulting firm The Directorship Search Group in Greenwich, Connecticut.

"Today, board candidates do a lot more digging to find out if there are hidden hazards," Beebe asserts. "They want to show the [D&O] policy to their lawyers and to know more about the corporate culture, the other directors and the external auditor. So a young company can provide a copy of their D&O policy and say 'We understand that you may want to meet our directors, auditors or other people, and we will make that happen.'"

While company stock and stock options can also act as a lure, Beebe urges entrepreneurs to seek directors motivated by the intellectual challenge of being part of a growing company-and not by a potential windfall. "Money should not be a prime motivator for board service," he says. "If it is, then you have the wrong person."

Jennifer Pellet is a freelance writer in New York City specializing in business and finance. Joshua Kurlantzick is a writer in Washington, DC.