Friday, July 17, 2009

More bad news in the US economy

It seems increasingly likely that CIT Group, a major lender to small businesses in the United States, will file for bankruptcy protection soon.

Small businesses are seen as keys to economic recovery but now a major company that lends to thousands of small and mid-size businesses is about to go tits-up. Not good news for an economy in recession and bleeding hundreds of thousands of jobs a month.

In a last-ditch effort to avoid bankruptcy, CIT was trying Thursday to line up $2 billion to $4 billion in rescue financing from its debtholders within the next 24 hours.

Many retailers fear the impact of a CIT bankruptcy because the loss of financing could seriously disrupt the flow of merchandise.

Three prominent retail trade groups sent letters to financial regulators this week warning that the failure of CIT would rip a hole in the industry supply chain. Dunkin' Donuts said the ability of its franchisors to open new stores or expand operations could be affected. And New York bankruptcy lawyer Jerry Reisman said he received more than two dozen calls from panicked stores and apparel manufacturers, some of which said they may not have the money to pay their employees today.

CIT plays an important behind-the-scenes role in the retail industry. When stores place orders for merchandise, they typically have two to three months to pay for the goods. Suppliers hand those IOUs over to lenders such as CIT - a process known as factoring - which in turn provide suppliers with cash upfront to make their merchandise.

If that system were to be disrupted, industry experts say, the result could be barren store shelves and a ruined Christmas for many US retailors.


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