The impact on holiday sales could hamper the recovery’s start. By Laura Kennedy, Associate Editor July 29, 2009 One big repercussion from CIT Group’s woes: even more new troubles for retailers. The $3-billion deal that the lender orchestrated with bondholders will keep CIT afloat, at least for several months, but it will crimp a key business line for retailers: vendor financing.CIT serves as a “factor,” or lender for vendors, which typically need bridge loans because they’re not paid for goods that stores order from them for anywhere from 60 to 120 days after retailers receive them. The loans are especially important in keeping operations afloat for smaller suppliers. CIT’s factoring cutback, which seems all but certain, will leave many vendors and retailers in the lurch. Factoring for retailers and lending in riskier industries such as restaurants and franchising have long been CIT’s specialty. Preserving liquidity will be CIT’s top priority now. “They are very good at factoring; they make money at it,” says Mark Wasden, vice president and senior credit officer for Moody’s. But “the risk-return relationship is going to be a key driver of where they allocate their available dollars. …That’s the constraint on any business activity this firm engages in.” Advertisement As a result, many stores will face problems stocking their shelves for crucial holiday sales, when retailers make 25% to 40% of annual revenues. CIT works with about 2,000 small and midsize vendors that supply about 300,000 U.S. retailers with merchandise. The firm lent $5.4 billion to its retailing clients as of the end of the first quarter of 2009. Many retailers will scurry to strike deals to stock up for Christmas. Stores have mapped out selections for the holiday season, and it “gets difficult to change that,” says Scott Tuhy, vice president and senior analyst for Moody’s. Retailers facing suppliers without financing will decide it’s “too late to scramble” for new vendors and will do what they can to put the planned merchandise on the shelves, says Tuhy. Urban Outfitters has already said it would consider lending to its vendors, and others with stable balance sheets are bound to follow. Having to pay up front for merchandise means retailers will probably be more conservative with their purchases and will want discounts. That’s bad news for consumers: Stores were already planning to offer fewer choices this holiday season. As consumers continue to keep a tight grip on their purse strings, inventories are down anywhere from 10% to 20%. Advertisement When it’s time for holiday shopping, there may be a lot of bare shelves. It would be another blow to a struggling economy if shoppers go home empty-handed not because they’re unwilling to spend, but because they can’t find what they want. “A lot of these smaller companies have a lot of creative people who bring … newness to the industry,” says Marie Driscoll, director of consumer discretionary retail and equity analyst for Standard & Poor’s. “They make things that look new and different and unique.” Without the marginal firms, some of the spice in the assortment will disappear, Driscoll says. Also hit by CIT’s retreat: franchisees. They, too, rely on lending from CIT, which has expertise in the sector and plays an important role in extending loans backed by the Small Business Administration. As CIT tightens up on franchise credit, banks will step in to help, but there’s no way they can fill the entire gap. Jonathan Crawford contributed to this story. For weekly updates on topics to improve your business decisionmaking, click here.