Image: NYC garment district
Seth Wenig  /  AP
New York-based CIT provides short-term financing to businesses that can't afford to wait the typical 60 to 90 days it takes to get paid by retailers.
updated 7/19/2009 2:27:38 PM ET 2009-07-19T18:27:38

The possible collapse of a key lender is sending panic through the retail industry, threatening to hang up deliveries of back-to-school clothing and other merchandise and throw holiday ordering into disarray.

A bankruptcy filing by CIT Group would hurl more trouble at an industry already hammered by the worst spending slump in decades.

Industry experts say that any short-term disruption in financing by CIT could ripple throughout the industry.

New York-based CIT fills a crucial role in the retail industry by helping companies that make items get paid faster by the stores that sell them. It does this by providing short-term financing, mostly to small- to medium-sized businesses that can't afford to wait the typical 60 to 90 days it takes to get paid by retailers.

These so-called factors, which do credit checks on merchants, also guarantee that suppliers get paid by the merchants even if they stop paying the bills, so that lack of assurance could force suppliers to ship goods at their own risk.

The ripple effect could be as simple as a zipper supplier who can't rely on CIT to advance payment for orders. That would then hurt trucking companies that would ship the zippers and overseas factories that need the zippers to make dresses. That could mean mounds of zipperless dresses at factories or piles of goods sitting on docks.

"CIT is like an octopus with its tentacles that reach out to so many industries and sub-industries," said Jeffrey Knopman, a principal at Profit Solutions Group, which helps suppliers recover chargeback money from merchants.

As the prospect of a CIT bankruptcy filing loomed, industry trade groups increased their pitch to lawmakers to prevent the collapse of CIT, which they say would imperil their small-business members and derail the already fragile economy.

"This is a potential crisis for Main Street," said Kevin Burke, president and chief executive of the American Apparel and Footwear Association. "The industry is already battling less inventory and battling a recession. If you can't get the product, how do you get consumers into the store?"

Bud Konheim, president of designer dress firm Nicole Miller, said any disruption in manufacturing caused by a lack of financing could shut down the pipeline for new goods. His company depends on CIT to finance its fabrics.

"Everybody is frantically thinking about what could happen," said Konheim."CIT reaches everybody in the business, from the fabric guy to the zipper guy. If we can't get the zippers, we can't make the item. One little thing can stop the whole process."

CIT is a key lender to the retail industry, but its most important role is serving as factor to about 2,000 vendors that supply merchandise to 300,000 stores, according to Craig Sherman, spokesman at the National Retail Federation. Analysts say 60 percent of the apparel industry depends on CIT for financing, so other lenders taking up all the slack would pose a big financial strain.

Any disruption in financing couldn't happen at a worse time for retailers. Stores have slashed inventory to respond to lower demand, and this holiday, analysts expect inventories to be down as much as 20 to 30 percent. Sherman said that if suppliers can't finance their orders, consumers will see even fewer choices in the stores.

Furthermore, he noted that if vendors can't get their financing, some retailers may have to pre-pay for orders, which could put more financial pressure on them.

Federal official negotiating with CIT knew a collapse would affect the economy, a Treasury spokeswoman said Thursday. But because the company had scaled back lending in previous months, she said, the economic hit would not be as bad as some earlier predictions suggested.

Retail industry insiders argue that with other lenders already under financial strain, many CIT clients may lose their financing options. That could lead to another flurry of banruptcies.

Harold Reichwald, an attorney in Los Angeles with the firm Manatt, Phelps & Phillips, said CIT has been refusing requests from manufacturers to withdraw credit balances — the equivalent of bank deposits, except that they are not federally insured.

Already many of CIT's clients were scrambling to find other financing. But Andrew Jassin, co-founder of apparel consultant Jassin-O'Rourke Group LLC, noted that doing that takes time even for the financially healthy.

Melissa Savarino, owner of a Houston-based children's wear maker that has CIT as a factor, said she is trying to find other financing from places like Wells Fargo, but it's been difficult.

She noted that she panicked after not getting $11,000 from CIT on Wednesday, though the funding was restored the next day. Next week, she starts buying fabric for the holiday season but may have to be more conservative with her orders.

"If CIT stops funding our business, and there is no one else to replace it, then I can't go on," she said.

Harry Kazazian, CEO of privately-held Exxel Outdoors Inc., the top U.S. maker of sleeping bags, said that he withdrew as much of the company's money as he could from CIT on Monday.

Kazazian is worried that the absence of federal help will have big consequences.

"How could they leave these sectors twisting in the wind?"

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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