Retailers are fearful of a CIT bankruptcy
Lending firm provides loans to many stores
WASHINGTON — The potential bankruptcy of lending firm CIT Group threatens to disrupt the flow of merchandise between retailers and their vendors just as they are gearing up for the crucial holiday season.
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.
“They are unbelievably concerned right now,” Reisman said. “What we may have here is a total disruption in small business.”
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 said, the result could be barren store shelves and a ruined Christmas.
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 compa-
nies 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 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.
CIT had asked the federal government for help in avoiding bankruptcy, but officials this week refused to step in. The Treasury Department lent $2.3 billion in to the company in December. Some officials now expect that investment to be lost.
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.
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