Will CIT's Bankruptcy Hurt Franchising?

The announcement earlier this week that CIT Group was filing for bankruptcy was something many in the small-business world expected — but had hoped wouldn’t happen.

How much will the company’s bankruptcy affect franchising? Bob Coleman, editor of trade publication the Coleman Report, says small-business lending has fallen by 50 percent this year (to which entrepreneurs might reply, “Only 50?”). Lawyers involved with the case have estimated CIT’s bankruptcy could leave over 1 million small and midsized businesses seeking funding.

But given that CIT had already cut back drastically on its loans to small businesses and the franchise community, perhaps the damage will be less than it might have been. The number-one SBA lender in dollar terms in 2008, when it accounted for 6 percent of SBA loans, in the first six months of this year CIT accounted for just 1 percent of all SBA loans during the same time period.

CIT primarily lent to two groups: franchises and retailer suppliers. While it was still lending to retailers, its lending to franchises had virtually ceased. "In the past, CIT has been an important lender to franchise businesses," International Franchise Association (IFA) VP of communications and marketing Alisa Harrison told CNN Money. "However,” she added, “earlier this year they dramatically reduced their lending to the industry as a result of their financial problems, prompting franchise companies to seek alternative capital sources to replace CIT."

Dunkin' Donuts used CIT as a preferred lender for years. Dunkin’ spokesman Andrew Mastrangelo told CNN Money that CIT's lending had declined drastically as the economy shrank. “Lending volumes by CIT with our franchisees are certainly lower in 2009 than in previous years."

Dunkin' Donuts doesn’t expect the CIT bankruptcy to hurt its franchisees. In July, franchisor Snap-On Tools canceled financing plans it had in place with CIT. Apparently, given that CIT’s lending to the industry had already dwindled, some franchisors started looking elsewhere.

But given the gloomy state of small-business lending in general — and startup financing in particular—the loss of any financial source for the franchising industry is bad news.

In the meantime, franchisees and prospective franchisees had best put on their thinking caps and get even more creative in their attempts to find financing.