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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.”
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%.
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.
-
What Could the Election Mean for Student Loans? Harris vs TrumpAs the presidential election heats up, here’s a closer look at each candidate’s plans to address student loans.
-
Get the New "Medicare and You" Handbook for 2025Here's how to get a free version of the "Medicare & You" handbook and learn about upcoming Medicare changes.
-
Kiplinger Special: How Businesses Should Budget for 2025Kiplinger Forecasts From fuel to AI software subscriptions, here's what you can expect to pay next year.
-
Apple’s Strong Start in Virtual RealityThe Kiplinger Letter Apple’s first year in the VR market sets it up for long-term success. The tech giant’s vision will take years to pay off, though.
-
Intel Braces for an Even Tougher Road AheadThe Kiplinger Letter Amid a long, costly turnaround, Intel resets expectations again. Its new woes raise questions about U.S. industrial policy and global chip competition.
-
Astronomical AI Spending Is Causing Jitters on Wall StreetThe Kiplinger Letter Amid rampant excitement over artificial intelligence, a new round of skepticism is taking hold. Here are four forecasts about the future of generative AI.
-
Car Prices Are Finally Coming DownThe Kiplinger Letter For the first time in years, it may be possible to snag a good deal on a new car.
-
Rising Cyber Threat of AI: The Kiplinger LetterThe Kiplinger Letter Security experts warn that generative AI brings new risks with no clear defenses. With AI's rapid adoption, businesses are vulnerable.
-
New Graduates Navigate a Challenging Labor MarketThe Kiplinger Letter Things are getting tough for new graduates. Job offers are drying up and the jobless rate is increasing. Are internships the answer?
-
Kiplinger Special: The Long-Term Future of the U.S. EconomyThe Kiplinger Letter Kiplinger's report into what it will take the U.S. to maintain a healthy economic growth rate.
