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CIT bankruptcy: what it means for small business.

Nov 4, 2009

On Sunday, Nov. 1, CIT Group--a huge player in the small-business lending arena--filed for Chapter 11 bankruptcy. The ongoing troubles for CIT, which gained notoriety in late-2008 as a recipient of TARP funds, and again in July 2009 when it was first rumored they would file bankruptcy, could leave many small businesses in a lurch.

Although the CIT bankruptcy is the fifth largest in U.S. history, it was the first bank in the current economic downturn to be deemed not "too big to fail" by government officials who declined to step in. Based on reports of the filed bankruptcy plan, and the Dec. 8, 2009 hearing date scheduled by a U.S. bankruptcy judge, it is expected that CIT's court protection will be short, with the company back in the control of its debt holders by the end of the year. CIT has said that none of its subsidiaries, including CIT Bank and Utah state bank will be included in the filings, meaning, hopefully, a smooth transition.

CIT, a 101-year old lender has been a major player in small-business lending, serving as the largest U.S. Small Business Administration (SBA) 7(a) lender for nine consecutive years--not to mention the top lender to women, minority and veteran owned small businesses for six consecutive years. Additionally, CIT has been the biggest player in factoring--a form of financing used by many small businesses that are unable to secure traditional loans or credit lines. Factoring enables companies to pledge their receivables in return for working capital, and is critical to many vendors that supply retail stores. According to the National Retail Federation, CIT serves 2,000 vendors that supply merchandise to 300,000 stores across the country.

The only silver lining to the bankruptcy filing is its timing. With the holiday shopping season just weeks away, many retailers have already purchased needed merchandise, thus avoiding a huge gap in the supply chain that could have been created by a bankruptcy filing back in July.

Despite CIT's insistence that they will continue lending to small business, there has been a visible pull-back. SBA officials cite an 82 percent decrease in CIT's small-business lending in SBA programs. Additionally, CIT's factoring business dropped 19 percent over the last year. Whether that pull-back is due to CIT or a decrease in demand by small-business owners' concerned with CIT's financial viability is unclear.

Looking ahead, CIT's bankruptcy filing may offer other banks a new opportunity to lend to small businesses. The key question is: will they? Despite an uptick in optimism about the U.S. economy and reports of a recovery underway, many small businesses are still feeling the pinch. Many small businesses will be turning to other banks for lending, including community banks, given that they are one of the few banks that continue to make character-based loans. Wells Fargo is also likely to pick up some of CIT's factoring business.

Please click here to watch NSBA President Todd McCracken discussing the CIT bankruptcy.
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Publication:The Weekly Advocate e-Newsletter
Date:Nov 3, 2009
Words:501
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