Retailers fear CIT failure could ruin Christmas shopping season

While many people expect a slow Christmas selling season thanks to the recession, retailers fear the situation could be even worse than expected if CIT Group (CIT) is allowed to fail. The fear is based on the fact that CIT caters to apparel and furniture manufacturers -- two of the hardest hit areas -- that typically need long lead times to produce goods and have high manufacturing costs.

Retailers place orders for their fall and winter merchandise right now. Without the cash they normally get from CIT, suppliers may not be able to buy the materials they need to produce goods. Retailers worry that without goods to sell there won't be a chance of recovery during Christmas -- the best selling season of the year.
"Any additional tightening of credit markets will only exacerbate the constraints on our members' ability to provide the products that consumers seek and most importantly, to maintain millions of retail jobs across the nation," the Retail Industry Leaders Association said in a letter to Treasury Secretary Timothy Geithner asking him to reconsider his position not to help CIT. The National Retail Federation also sent letters to financial regulators pleading that they reconsider a lifeline for CIT.

CIT's role in all this is that when stores place orders for merchandise they do it on credit and have two to three months to pay the bill. Manufacturers raise cash to buy the raw materials they need by selling these IOUs -- a process called factoring. Without that needed cash, suppliers just won't be able to buy the raw materials and store shelves could be emptier this Christmas season.

In an internal report released earlier this week, CIT said that about 760 manufacturers and 3,000 retailers would be hurt if funding was not found. While large consumer products companies get credit directly from banks, small businesses must turn to companies like CIT, which is the largest funding source for many small businesses.

Franchisers also fear a loss of credit if CIT fails. Dunkin' Donuts told The Washington Post that CIT would rip a hole in the industry if it fails. Franchisers would not be able to get the money they need to open new stores or expand operations.

A New York bankruptcy attorney, Jerry Reisman, reported to the Post that he's gotten more than two dozen calls from panicked stores and apparel manufacturers. Some of the companies say they may not have the money to pay employees as early as today. "They are unbelievably concerned right now," Reisman told the Post. "What we may have here is a total disruption of small business."

With credit markets frozen and the big banks not lending, small businesses have nowhere to turn but to companies like CIT to raise the cash they need to continue operations. While some call CIT a loan shark for the interest rates it charges small businesses, others think of it as their only lifeline.

CreditSights indicated yesterday in a research not that CIT needs about $4 billion to $6 billion to continue operating. Some reports indicate that bondholders are considering restructuring CIT's debt from short term to long term debt to give the company more time to raise the cash. That restructuring may be CIT's only chance of avoiding bankruptcy.

Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies.

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