CIT will not be around much longer if it emerges from bankruptcy without a more sustainable way to finance small businesses. More specifically, it must learn not to depend on the commercial paper market as an ubiquitous source to fund its lending activities. Additionally, it has to do a better job of laddering its bond obligations to match the term loans and lines of credit that it provides to companies.
According to the mainstream press, CIT lends to over one million small businesses with an emphasis on franchises, seasonal funding for retailers and lines of credit. Its franchise financings are mostly term loans that are partially guaranteed by the U.S. Small Business Administration.
SBA’s basic 7(a) term loans for working capital fully amortize in five to seven years. Equipment and real estate loans pay off in 10 and 25 years, respectively. As such, CIT’s current loans will remain intact even if CIT ceases to exist or reduce its lending appetite.
If CIT is not around when its term loans come due, there are other financiers waiting in the wings. As expected, the new lenders will underwrite applicants on their own merits. But CIT would do likewise and refuse to re-lend to borrowers that no longer meet its benchmarks.
Applicants with good credit, a history of adequate cash flow and prospects for continued growth can get term loans ─ regardless of what happens to CIT. Notably though, the recession has made it more difficult for some businesses to qualify.
Most small-business lenders do not finance start-ups. The ones that do will require collateral. In many instances, that means pledging real estate. So if your projected cash flow is inadequate to make debt service payments, the lender will grab the collateral as a secondary way to get paid off.
Seasonal funding, lines of credit and other servicing-intensive financing vehicles are less available than term loans. CIT filled that important niche and finding a replacement may be more difficult. Large banks have the expertise and servicing capabilities. But most will not take on clients as small as the ones that CIT catered to. And smaller community banks do not have the trained staff to service that business. Moreover, they may not gear up to fill the void.
That is where companies like The Interface Financial Group can help when businesses need cash flow. “We don’t compete with banks,” says Fred Dunayer, owner of an IFG franchise in southwest, Fla. He says that the banks refer business to him when the deal does not meet traditional lending parameters. “Examples include the company not being in business long enough, being too small, or having had credit problems in the past,” he says.
IFG buys discounted invoices. Instead of underwriting their small-business clients’ as a bank would do, they are more concerned with the quality of the invoices and the likelihood that they will be paid on time. “Assuming the company (IFG’s client) has current receivables from solvent companies, we’re able to step in,” Dunayer says.
Similar to buying invoices, factoring companies buy accounts receivable. As with invoice buyers, the factors will also scrutinize the quality of your accounts receivable.
According to Steve Bloom, a volunteer SCORE business advisor in Atlanta, Ga., factors provide “short-term capital based on the credit of the buyer of the goods or services.”
But whether you are selling accounts receivable or invoices, Bloom says that it “can also be expensive.” He warns, “If costs of goods sold are too high, profitability and economic feasibility is difficult.” Even so, short term funding by selling invoices or accounts receivable may be necessary for a fast cash flow injection to meet your operating expenses.
CIT has been a stalwart lender for small businesses. But there are alternatives if you look for them.
Jerry Chautin is a volunteer SCORE business counselor, business columnist and SBA’s 2006 national “Journalist of the Year” award winner. He is a former entrepreneur, commercial mortgage banker and business lender.
Follow Jerry Chautin on Twitter: www.twitter.com/JerryChautin
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