The long arm of the credit crisis: this is no time to be scrimping on insurance protection.

• Author: Jones, Lisa M.
• Position: RISK MATTERS

WHAT IS THE IMPACT of tightening credit on private companies and smaller (micro-cap) public companies? And what risks does this create for their directors?

By now it isn't exactly front-page news that the subprime mortgage meltdown, which began during the third quarter of 2007, has deteriorated into a full-blown business credit crisis:

* The World Economic Forum's Global Risks 2008 report cited "systemic financial risk or a system-wide financial crisis as the most immediate and severe risk" facing businesses worldwide.

* The U.S. Federal Reserve reported in April that 52% of banks had tightened lending standards for companies with sales under $50 million, up from 30% in January.

* According to the Chubb 2007 Private Company Risk Survey, 33% of private company executives were concerned about tighter access to capital--and that was in late 2007, before the economy had deteriorated.

It has been said that the credit crisis affects only those companies with debt. But capitalism thrives on debt, so in reality most companies are affected, and smaller companies, in particular, are more likely to need access to credit simply to continue operations.

Some experts note that with banks operating under closer regulatory scrutiny the credit pendulum has simply swung back to more prudent loan risk assessment after a prolonged period of reckless loan practices. But others note the pendulum may have swung too far, too fast--that even healthy companies are being deprived of needed funds for expansion and hiring.

Regardless, for companies that are unable to gain access to precious capital, the pain is real and is taking many forms:

* Many businesses are unable to get loans approved at all.

* Companies are having difficulty renewing and extending lines of credit.

* The waiting period for loans has dramatically increased, forcing companies to delay plans.

* Even growing companies that have good credit or that need capital in order to expand so they can meet orders are being hit with tighter credit terms and higher interest rates.

The restricted access to capital, combined with rising energy and commodities prices, has given many companies little choice but to implement cost-cutting programs, shelve expansion and other investment plans or even close locations, trim employee benefits programs, and delay hiring and/or lay off employees.

So, what's the risk for directors?

Shrinking company profits, stock price volatility, and a rising threat of insolvency all pose...