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For CIT Customers, An Uncertain Future Looms

Posted by Internet Guru
November 4, 2009

CIT Group Inc. began its final attempt to restructure this week, leaving many small-business customers with unanswered questions about their obligations and future relationship with the century-old commercial lender.

The New York company, which anticipates exiting bankruptcy before the end of year, has reassured customers that it will operate as usual while its holding company goes through reorganization. Bankruptcy experts agree that customers who have contracts or debts owed to CIT likely won’t see any changes in coming months. But the real test is yet to come, when CIT emerges from Chapter 11.

“For CIT to open the spigot again, it needs to be well-capitalized and supposedly [bankruptcy] will help the capital side,” says Joseph Baldiga, a partner and head of the reorganization group at Mirick O’Connell LLP in Westborough, Mass. “We will have to wait and see if [CIT] lends or preserves the capital in order to make itself look better in terms of survivability.”

CIT’s pre-packaged plan is to be considered at a Dec. 8 hearing, and until then, the company says it will operate under the status quo. “We remain in constant communication with our clients,” the company said in a statement. “Credit is being approved, invoices are being collected and funds are being remitted.”

Still, CIT continues to turn away loan seekers and scale back its small-business

lending initiatives. According the Small Business Administration, CIT’s lending to small businesses plummeted 82% in fiscal 2009, which ended in September. During that period, CIT lent only $105 million in SBA-guaranteed loans to 142 businesses, compared to $575 million to 1,195 small businesses a year earlier.

As a result of CIT’s pullback, former small-business customers have searched elsewhere for alternative financing for start-up and growth capital. But CIT offers another service to small businesses that can’t be easily substituted: Factoring.

CIT’s factoring volume fell 19% – to $8.2 billion from $10.1 billion – in the twelve months following the company’s 2008 second quarter. The drop, the company said, was due to the weakened retail sector, as many CIT factoring customers are small or mid-sized vendors who sell to the retail industry.

Factoring allows vendors to collect on invoices quickly. Instead of sending retailers an invoice and waiting for payment, vendors can sell the invoice to a factoring company such as CIT, which will immediately pay the vendor a large percentage of the invoice and – for a fee – assume the task of collecting the owed amount. Once the retailer pays, the factoring company will send the balance to the vendor.

source: online.wsj

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