Patrick Von Bargen, of the National Commission on Entrepreneurship, estimates the measure could benefit up to 200,000 high-growth firms, especially "knowledge-intensive" firms that own few physical assets they can secure loans against. A side benefit of the measure, he notes, is the opportunity for young companies to establish bank relationships early, giving nascent businesses the chance to secure loans more easily. --Alix Nyberg
CAPPING LIABILITY
Supreme Double Play
Corporations struck out in two recent U.S. Supreme Court decisions involving wage awards, and both cases underscored financial liability issues. In United States v. Cleveland Indians Baseball Co., the team doled out back pay in 1994 as the result of a free-agency settlement. It paid taxes at the 1994 rate, then asked for a refund from the IRS, claiming that it should have been taxed at the 1986 and 1987 rates, when the wages were due. A district court awarded the team a $97,202 refund. However, the Supreme Court overturned the ruling in April, deferring to the IRS's "reasonable" interpretation of its own rules.
CFOs should also be cognizant of the FICA tax ramifications of back- pay settlements, says Stephen Kinnaird of Sidley Austin Brown & Wood. Kinnaird points to settlement structures that stretch payments over several years, which may occur with large awards of $500,000 or more. Because there is a wage cap on FICA taxes for the first $80,421 (after reaching the annual threshold, salaries are FICA-tax-free), corporations would wind up paying more in Social Security taxes over multiple years than in a one-time payment.
In the second case, Pollard v. E.I. du Pont de Nemours & Co., the high court overturned the U.S. Court of Appeals for the Sixth Circuit and declared that "front pay" tied to discrimination suits is not subject to compensatory damage limits. The Sixth Circuit, which reviews appeals from Kentucky, Michigan, Ohio, and Tennessee, is one of the last federal circuits to place front-pay restitution under the $300,000 cap for damages under Title VII of the Civil Rights Act, notes Mike Marshall, vice chair of the employment law practice at Stokes Bartholomew Evans & Petree in Memphis. Front pay is often awarded in wrongful dismissal suits to compensate for wages lost from the time of the judgment until reinstatement, or instead of reinstatement.
"Once a corporation is found guilty of violating the Civil Rights Act, there isn't much it can do to mitigate the financial effects," says Marshall. -- Joan Urdang
CORPORATE VENTURE investing fell 81% during Q1, compared with a 39% drop by stand-alone funds, says PricewaterhouseCoopers.
CREDIT INSURANCE
Backing Up Buyers
More than a year ago, major banks began offering online B2B suppliers credit instruments to back their promises to deliver products to customers. Now, insurers are offering to cover online buyers' obligations to pay.
One proponent of the insurance product is Joshua ten Brink, vice president of online seafood exchange GoTradeSeafood.com. He contends that vendors around the world are interested in trading with new partners, but most are wary of extending credit to unfamiliar companies that could present payment collection problems. While the industry has traditionally used letters of credit, the process of securing one takes hours--sometimes days--making it unsuitable for speed-seeking Internet merchants.
Hoping to boost the ex-change's transaction volume, ten Brink offers buyers credit ratings and insurance products from the France-based credit giant The Coface Group. New buyers pay up front for a credit rating that is executed and backed by Coface. "The rating is an alternative to a letter of credit," says ten Brink.
But differences do exist between traditional and cyber letters of credit. Most notably, the Internet gives insurers access to real-time credit information on buyers, so insurance companies can parcel out coverage on a transaction-by-transaction basis. That's a significant departure from traditional plans, in which merchants pay for portfolio coverage allowing insurers to spread risk over many transactions.
Such automation can be crucial to making the coverage cost- effective. Witness Earthking Alliance's Econstructionparts.com. The online marketplace bears the buyer's risk on transactions ranging from $500 to $50,000. To mitigate the risk without creating an internal credit department, vice president Patrick Carroll turned to eCredible, a unit of Swiss Re's NCM, for credit checks, as well as insurance for up to 90 percent of the dollars promised. "It takes a little bit of the margin on all open account transactions, but that's far less than any other structure would take to handle the volume."
To date, few buyers have used rating and coverage packages, but insurers predict that will change when online markets become more liquid. To that end, heavyweights like Coface and NCM, along with Gerling Credit Insurance Group and AIG, are leveraging their huge corporate credit history databases and moving buyer credit instruments to the Web. --A.N.
DISCLOSURE RULES
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