Small Business Lender Files for Bankruptcy

CIT group, a nation’s leading lender to small businesses, has filed for Chapter 11 bankruptcy protection. The bankruptcy was expected, since the company was struggling for months to avoid it, and came very close to declaring Chapter 11 bankruptcy in July 2009 after the Treasury rejected the CIT’s request for additional bailout money, but was rescued making the agreement with the bondholders group. The lender filed for bankruptcy on Sunday, after the debt-exchange offer made to CIT’s bondholders failed. Company’s bondholders opted for a prepackaged reorganization plan which will reduce its debt by $10 billion and allow it to continue doing business.

The troubled lender posted more than $5 billion in losses in the last nine quarters. With $71 billion in assets, CIT bankruptcy filing is one of the biggest in the U.S. history, following giant companies Washington Mutual Inc., Lehman Brothers Holding Inc., WorldCom Inc., and General Motors Corp. The $2.3 billion in Troubled Asset Relief Program (TARP) money that the U.S. government gave CIT is most likely to be lost.

CIT seriously pulled back on its lending to businesses as most recent earnings report shows that the company originated just $4.4 billion worth of new business in the first half of 2009 compared to $11.3 billion in the first 6 months of 2008. CIT said Sunday that none of its operating units, including Utah-based CIT Bank, were included in the filing, and are planing to continue lending. CIT has filed a number of motions to allow it to continue operations, including requests to keep paying salaries and other employee benefits and to pay its vendors in full, keeping its small business financing functional. But still thousands of small businesses are feeling unease about the CIT’s process.

CIT lends to a million small and medium businesses, and filing for bankruptcy will put many of those businesses, especially retailers, in a difficult position of having to look for a new source of funding. The company provides financing to about 2,000 vendors supplying 300,000 U.S. retailers that are relying on CTI to cover various costs including paying for orders and making payroll. Somewhere around 60% of the apparel industry is depending on CIT for financing, and retail groups and analysts are expressing their concern that the lender’s bankruptcy will probably add to the uncertainty in the retail sector. For retailers it is critical to have a lender they can rely on, especially during and after the holiday season when they will need to renew the supplies of merchandise.  The retail industry has been preparing to switch to alternative source of financing since the last July when CIT’s financial difficulties drastically intensified, but finding that alternative at rival companies has not been easy since the credit market is still not loosening up for the small and medium companies.

It is also estimated that a selling a business could be one of the solutions for the situation.