The CPA Consultant


By Sally A. Wahrmann

As the year 2000 approaches, many of America's small businesses find themselves in a quandary. With the seriousness of the Y2K problem finally upon them, they are unable--or unaware--of how to proceed. Daily cash flow problems are impeding or preventing their ability to address the problems of noncompliant equipment or software.


On April 2, 1999, President Clinton signed Public Law 106-8 (commonly referred to as the Small Business Year 2000 Readiness Act) into being. The legislation is intended to ensure that small businesses "have access to the capital they need to be 'Y2K-OK.'"

Public Law 106-8 is an outcome of the Year 2000 Information and Readiness Disclosure Act signed into law October 19, 1998. The act created a specific exemption from the antitrust laws for competitors in an industry that share information concerning Y2K solutions. However, the law affords no protection for statements made to individual consumers while marketing a product normally used for personal purposes. The October 1998 law sought to assist businesses, governments, and other organizations in obtaining informational tools that would correct the Y2K computer problem. This limited antitrust exemption made it easier for firms to share information while, at the same time, protecting consumers from industry agreements to boycott, allocate a market, or fix prices or output.

Once passed, the Year 2000 Readiness Disclosure Act was used to encourage trade associations; umbrella organizations; small businesses; and state, local, and tribal governments to collect Y2K information from their members and constituents. Furthermore, the sharing of such information via educational seminars and the expansion of the website at became a reality less than six months later.

Public Law 106-8, the next step, makes $500 million dollars available to businesses qualifying under the Small Business Administration (SBA) Section 7(a) Loan Guaranty Program. It affords maximum flexibility in establishing terms and conditions of the loan; allows up to a one-year moratorium on principal payments; and provides that any reasonable doubts regarding a loan applicant's ability to repay be resolved in favor of the applicant.

Loan proceeds can only be used to address Year 2000 issues. As such, approved uses include--

  1. repair and acquisition of information technology systems;
  2. purchase and repair of software;
  3. purchase of consulting and other third-party services, and related expenses; and
  4. after January 1, 2000, relief from a substantial economic injury incurred as a direct result of the Year 2000 computer problems or as an indirect result caused by any other entity such as a service provider or supplier, if such economic injury is not compensated for by insurance or otherwise.

The SBA will administrate the program. Thus (as with all its programs), the SBA can guarantee up to 90% of Y2K loans of $100,000 or less and up to 85% on Y2K loans of over $100,000. However, applications processed via SBA Express continue to have only a 50% guarantee. Additionally, any borrower who has an existing SBA guaranteed or direct loan of up to $750,000 may apply for an additional $250,000 of credit under this

The law is scheduled for repeal on December 31, 2000. Questions or comments regarding the Y2K Action Loan Program can be directed to Greg Diercks at or the SBA Answer Desk at (800) U-ASK-SBA. The hearing impaired may call a TDD number: (703) 344-6640.

The Details

The SBA's 7(a) Loan Guaranty Program is one of their primary lending programs. It provides credit opportunities for small businesses that are unable to secure funding under reasonable terms from regular lenders. Private sector lenders provide the loans, which are, in turn, guaranteed by the SBA. This program does not provide the SBA with funds for direct lending or grants.

As part of a loan application, the SBA primarily considers the ability to repay the loan from the cash flows of the business. Additional factors such as good character, management capability, collateral, and owner's equity at risk are considered important. All owners of 20% or more should be prepared to personally guarantee an SBA loan.

Businesses are determined to be eligible for SBA loans based on the following criteria:

* They are operated on a for-profit basis.

* They are engaged in doing, or propose to do, business within the United States or its possessions.

* They can demonstrate a reasonable level of owners' equity.

* They have exhausted available alternative financial resources, including personal assets.

* They qualify as a small business as defined in the Small Business Act.

That act defines eligible small businesses as those that are "independently owned and operated and are not dominant in its field of operation." The SBA has developed standards that define the maximum size of eligible businesses in certain industries. A partial list follows:

Retail and service $3.5­13.5 million in revenues

Construction $7.0­17.0 million

Agriculture $0.5­3.5 million

Wholesale No more than 100 employees

Manufacturing 500­1,500 employees

Since standards for a particular business may change from time to time, potential borrowers that are close to these limits should discuss their situation with the local SBA office.

Common ownership, directorships, or contractual arrangements (i.e., affiliations) that exist within companies require that the primary business activity be determined for both the applicant and its affiliated groups. The applicant must meet the size standard for its primary business activity, and the affiliated group must meet the standard for its primary business activity.

Special circumstances (i.e., other considerations) apply to applicants who qualify as franchises, recreational facilities and clubs, farms and agriculture, fishing vessels, medical facilities, and alter egos (holding companies). There are a number of financing plans available under SBA Section 7(a) policies and procedures. The Y2K Action Loan program seems to fit most comfortably in either the SBA Express or Community Express plan.

SBA Express

The SBA Express plan has been designed to meet five objectives:

1) Fast and easily obtained loans of $150,000 or less.

2) Less paperwork. Qualified SBA Express lenders may use their own forms and processes to approve SBA guaranteed loans. Prior credit approval from the SBA is not required, and the SBA will rely solely on the lender's credit analysis, forms, and procedures.

3) Quick SBA response. The SBA will respond within 36 hours of receiving a completed application.

4) Use of electronic loan processing by lenders.

5) Assistance to lenders in providing smaller, revolving-type loans.

In exchange for this flexibility, participating lenders accept a maximum loan guarantee of 50%. In general, the SBA requires loans to be fully secured. SBA Express, however, permits lenders to approve unsecured lines of credit up to $25,000. Most loans have a life of five to ten years. However, fixed asset loans can be approved for up to 25 years. Interest rates are negotiable between lenders and borrowers and may be fixed or variable. However, they may not exceed the SBA maximums (i.e., 2.25% over prime for loans of less than seven years and 2.75% over prime for loans of more than seven years).

Lenders that qualify under the SBA's Certified Lender Program are given partial authority to approve loans and receive a three-day turnaround on their loan applications. This program accounts for nearly one-third of all SBA business loan guarantees.

Lenders that qualify under the SBA's Preferred Lender Program are given full delegation of lending authority. As a trade off for delegating full authority to the lender, the SBA's guaranty is at a lower rate. The SBA examines the participant's portfolio periodically. This program accounts for more than 10% of SBA Loans.

A list of preferred lenders, taken from the SBA's website ( for the New York District office, is presented in Exhibit 1. Certified lenders, for the same New York District, are presented in Exhibit 2.

The Community Express Loan

The Community Express Loan (CEL) plan is in a pilot stage. It was developed in collaboration with the National Community Reinvestment Coalition (NCRC). The pilot (which is initially limited to selected NCRC lenders) will offer an SBA Express­type program, with some additional qualifying criteria, to pre-designated geographic areas. This plan serves mostly new markets and small businesses and includes technical and management assistance. Furthermore, CEL focuses primarily on low and moderate income areas. The maximum loan limit is $250,000, and the standard SBA 7(a) guarantees apply.

Lenders generally use their own documents and procedures; loans are centrally processed in Sacramento within 36 hours; applications may be processed via fax or Internet; and servicing is central (in either Fresno or Little Rock). Although presently limited to selected lenders and areas, it will be opened to additional areas (and all qualified participating preferred lenders) in the year 2000. A list of Community Express Lenders and the target markets are illustrated in Exhibit 3. Similar to SBA Express, lenders may approve unsecured loans of up to $25,000. However, for loans over $25,000, lenders may follow their existing collateral policy. Maturity and interest rates follow guidelines similar to the SBA Express program. *

Sally A. Wahrmann, CPA, is an associate professor of accounting at Long Island University­C.W. Post Campus. Her e-mail address is

Paul D. Warner, PhD, CPA
Hofstra University

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