The CIT Bankruptcy and its Impact on Small Businesses
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As many of you already know, CIT Financial, a major source of short term financing for small and medium sized businesses for over 100 years, filed for bankruptcy on November 1. http://www.cit.com/about-cit/restructuring/index.htm What effect will this have on the availability of working capital for companies like these? The popular media presents the usual gloom and doom scenario. My view is a little different. Here's why.
Although the holding company declared bankruptcy, its operating subsidiaries remain outside Chapter 11 and continue to serve customers. CIT's letter to its customers notifying them of the filing emphasized this and communicated a "business as usual" message. Of course, some of their customers might be wary of future surprises and will choose to move to one of CIT's competitors when their contracts permit doing so. Those who use CIT's factoring or leasing services should have no problem switching assuming, of course, that they have no financial issues of their own unrelated to the CIT situation. However, customers with conventional business loans, including SBA programs, may have more of a challenge moving, particularly if they are in an industry that is not currently in favor with traditional lenders.
There are still some potential pitfalls. Many other lending institutions have recently tightened their lending guidelines in order to increase capital reserves and mitigate risk. As a result, some existing clients whose own financial situation is marginal could be pushed out. CIT may also become more conservative in decisions to expand or renew lines or to take on new clients. This might result in capital availability challenges for businesses in some of the specialized industries that CIT has traditionally favored, such as the garment and furniture industries.
The biggest loser in all this appears to be the federal government (and the taxpayers). CIT received $2.3 billion in TARP funds last summer but that will likely be lost because of the bankruptcy. The bailout failed but a good, old fashioned Chapter 11 filing shows some promise of resolving the problem. Could there be a lesson here?
John Doucette - Liquid Capital of Northeast Ohio - www.lcneo.com
