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
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
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.