SMALL MANUFACTURERS, IMPORTERS, VENDORS TO MAJOR RETAILERS WILL BE HURT BY FAILURE OF GIANT FACTOR, CIT-TIME FOR ANOTHER RESCUE?

If you are a small manufacturer or wholesaler especially in the area of retail financing, it is likely that your financing company is CIT. This financing giant has pushed aside or acquired many so called FACTORING finance companies that is has become the major gorilla in the business.

In that position, it has become the only choice for manufactures and wholesalers who sell merchandise to retailers, and then factor their accounts. This allows CIT to purchase the invoices that are outstanding to the customers of these businesses, and provide instant advances against such invoices, thus providing fast cash to the business.

All types of manufactures use factors. some of the biggest names in the business of clothing manufacturing sell their invoices routinely to factors. Liz Claiborne, Tommy Hilfiger, etc., all factor their accounts.

The factor relies on the credit of the customer, a retailer such as WAL-MART or PENNEY or MACY is the customer on whose credit the factor relies for payment, and thus it does not care about the credit standing of its customer, who simply gets its money faster, by receiving the factor's advance.

This area of financing appeared to be solid until CIT posted large losses and turned itself into a BANK to get federal funding, like other banks.

Now what?

Just add this to all retailer's troubles already in the making, and add that to the troubles of reduced revenues of the manufacturers and importers who are already suffering.

There are other FACTORS, but where do you think that those other FACTORS get their financing from?

You guessed it, generally from banks that have themselves been recipients of the FEDERAL funds, and who may be tightening their lending to their clients, the FACTORS themselves!

The vicious circle of "lending dominoes" has stated its downward spiral.

In our own contacts with lenders and the deals that they are financing, credit remain tight for middle market businesses.

Lenders are demanding personal guarantees from principal stockholders on business debt from even well established and profitable businesses, and new loans are closely scrutinized and collateral demands have increased.

THE CREDIT PROBLEMS ARE CONTINUING MOSTLY DUE TO THE LACK OF KNOWLEDGE OR LEADERSHIP FROM THE GOVERNMENT ON HOW TO FIX THE CREDIT MARKETS.

All, emphasis added, ALL economic growth in AMERICA has been fueled and been possible due to the establishment of credit markets. The ability to borrow money to buy or expand businesses, and to finance new business ventures has been the driving force in AMERICA.

We were the leaders of developing "BUY ON TIME" pay later, etc., which fueled the economy. If you want that big screen TV set, or a new set of appliances, you simply "charged it."

Just like you "charged it", so does a business, especially small and middle market businesses.

When they get a big order, they may need to buy the materials to make the product that was ordered, and factor may be willing to advance the funds for the purchase of the materials, which a bank may not be willing to do.

So now you have the real story of why CIT may cause the collapse of many businesses and start a domino effect throughout the apparel industry, where FACTORING is the only means of financing the vital vendors.

Financial difficulties at commercial lender CIT Group Inc. will hurt small businesses that depend on credit to fund their growth and operations, though many of CIT's units serve an important function and are unlikely to disappear if the company restructures in bankruptcy court.

The company, which lends to small- and medium-sized businesses, is scrambling to devise a plan to assure clients and investors it can work its way out of a deepening liquidity crunch, the Wall Street Journal reported on Sunday.

On Saturday, the paper reported that CIT was preparing for a possible bankruptcy filing.

CIT said on Friday it is in active talks with the U.S. government to gain access to a key lending program, but there is no guarantee the Federal Deposit Insurance Corp FDIC will allow CIT to join the Temporary Liquidity Guarantee Program.

The government has made it clear that a possible bankruptcy by CIT is not seen as a systemic risk to the financial system, the Wall Street Journal reported, since other lenders including JPMorgan Chase & Co or Deutsche Bank AG can take on many of the same loans in which CIT specializes.

Oh sure, they want new risky loans like a hole in the head.

"I don't think it (a possible bankruptcy) would have a wide impact. We're not talking about a systemic issue," said on Sunday a restructuring adviser with extensive experience working with companies in the financing sector. The adviser declined to be named due to the sensitivity of the topic.

A U.S. Treasury Department spokesman declined to comment on Saturday when asked if the administration might consider coming to CIT's aid.

If the company does restructure its operations in bankruptcy court, some clients could suffer, though its most important units will survive.

"CIT has been an important provider of credit to not only retailers and retail suppliers, but a vast array of businesses for over 100 years," said Scott Avila, a partner for corporate restructuring adviser CRG Partners, which is not doing business with CIT. "So whatever restructuring they go through, I expect CIT or some portion of CIT to continue in the future."

In particular, CIT's factoring business is vital to the retail industry and unlikely to disappear, but its competitors may not have as much access to the needed credit markets to provide replacement financing to all clients of CIT..

Factors buy the right to collect on the invoice of a retailer or other company at a discount to the value of the invoice. Then the factor assumes the risk that the invoice will not be paid.

Still, there could be some pain to the company's smallest clients in the retail industry.

"It's a difficult lending environment, and those small retailers that have seen sales slow to a minimum already may have a hard time securing lending sources until spending picks up," said Melinda Crump, a spokeswoman for Sageworks Inc, which tracks and collates the financials of thousands of privately held U.S. companies, in an email.

Businesses that require substantial working capital depend on credit. Changes in financing options could force small businesses into tough choices such as having to fund a portion of their growth from cash flow until other sources of lending were to become available, she said.

Among its services, CIT provides financial products and advice to small and middle market businesses. It has more than $60 billion in finance and leasing assets and operates in more than 50 countries across 30 industries.

The lender became a banking company in December and obtained $2.33 billion of funds from the federal Troubled Asset Relief Program.

But it has lost close to $3.3 billion since the end of 2007, and in a May regulatory filing said it had $10 billion of funding needs to address in the year ending March 31, 2010.

On Wednesday, Fitch Ratings downgraded CIT deeper into "junk" status, a move that affected $35 billion of CIT debt.

Another rescue in the making?