CIT’s Troubles Are Small Business’ Troubles

The troubles at CIT will have a big impact on America's small businesses. Below is an article about CIT's troubles. CIT is an excellent example of why small businesses should have multiple funding sources such as alternative financing providers. Invoice factoring is an alternative source that small businesses should consider. By selling your invoices to a factor like ACD Financial Services, a small business can get immediate cash instead of waiting 30, 60, or 90 days to get paid.

July 13, 2009, 8:02 pm

CIT's Troubles Are Small Business' Troubles

By Robb Mandelbaum

The Agenda

The liquidity problems at CIT Group are certain to mean more bad news for small business. Late Sunday night, CIT acknowledged that it was "in active discussions with its principal regulators on a series of measures to improve the company's near-term liquidity position." CIT said it had retained a major New York law firm that specializes in bankruptcy filings but would not comment on the specifics of the assignment.

CIT is a diversified financier; among other lines of business, its commercial aircraft and railroad freight car fleets are among the largest in the United States. But of interest here is its role as a major lender to small- and medium-sized businesses. According to the most recent annual report filed with the Securities and Exchange Commission, CIT's lending to these firms totaled $21.1 billion in assets at the end of 2008, making this corporate financing segment the company's largest. (A separate division that provides trade financing to retailers reported $6 billion in assets.)

Moreover, CIT is among the largest lenders in the Small Business Administration's flagship 7(a) loan program. From 2000 to 2008, in fact, it was the single largest 7(a) lender, as measured by total dollars lent — in 2008, for instance, CIT lent 6 percent of all 7(a) dollars. However, CIT's S.B.A. lending has plummeted in 2009. In the first nine months of the fiscal year, the lender had made only $65 million worth of 7(a) loans; its share had fallen to just 1 percent of the total.

CIT had an unusual method for financing 25-year loans, according to Bob Coleman, an industry analyst who publishes the Coleman Report. It would sell the S.B.A.-guaranteed portion, or 75 percent of the loan, on the secondary market, and the proceeds would finance much of the company's new loans. To finance the other 25 percent, CIT would borrow short-term money and refinance it every three months. "They had a very good credit rating, so they could borrow at low rates in the commercial 90-day paper market." But when credit markets, including both for short-term notes and pools of S.B.A.-guaranteed loans, froze last fall, CIT couldn't fund new loans.

Mr. Coleman does not believe these problems figure greatly in CIT's bigger liquidity problems. In S.B.A. lending circles, CIT is regarded as having a strong portfolio of loans. "You cannot be the No. 1 lender for 10 years in a row and have a sloppy portfolio," he says. "They weren't doing some of the crazy things that other lenders would do." Though CIT's corporate financing segment lost $167 million in 2008, it was hardly the company's worst performer: CIT Group reported a total net loss of $633 million.

Other banks could enter the small business market, but so far few have. In fact, big players here are retrenching. In March, Bank of America's chairman, Kenneth Lewis, called his institution's small business portfolio a disaster; in the first nine months of 2009, Bank of America was the 85th biggest 7(a) lender by volume, down from fifth place in 2006. Then in June, Advanta, which billed itself as a leading credit card issuer to small businesses, closed its customers' accounts to new charges. With nearly one million accounts, Advanta apparently reached nearly 5 percent of all small companies.

Reported efforts by the Obama administration to bolster the 7(a) loan program will become even more urgent if one of the 7(a)'s biggest participants becomes the latest casualty of the present economic troubles.