Just when small businesses had begun to feel more optimistic about the economy came the news (reported by the Wall Street Journal last week) that CIT Group has hired a bankruptcy firm.
In addition to causing a flurry of panic in the financial community, the reports also caused tremors in the franchise community because CIT is the No. 1 originator of Small Business Administration-backed franchise loans, according to the International Franchise Association (IFA).
On Monday, the IFA threw its weight behind CIT’s attempts to get a federal bailout. IFA president Matthew Shay said in a letter to Treasury Secretary Timothy Geithner, “The volume of CIT’s small business lending is down dramatically this year, and we are very concerned that allowing CIT to enter bankruptcy will send the wrong signal to small businesses on Main Street.”
At the time of this posting, the federal government had decided not to bail out CIT. But reports that CIT had just entered talks with J.P. Morgan Chase and Goldman Sachs caused stocks to rebound today.
Bankruptcy for CIT is still a possibility, according to sources cited by Reuters, and this is a situation that bears watching closely by everyone in the franchise community.
Although CIT is small by some standards (the 26th largest U.S. financial institution, according to the Federal Reserve), it looms large in the small-business community as one of the biggest lenders to small business in general. Some estimates are that CIT provides capital and financing for 200,000 to 300,000 retailers each year.
But the damage CIT’s failure would cause would go far beyond that: The IFA estimates that every $1 million lent to franchises creates 34 jobs and $3.6 million in economic output each year. And if CIT fails, other lenders to small businesses and franchises are likely to get squeamish, too—cutting back available sources of capital even further.
If small companies can’t afford to keep running, to expand or to bid on economic stimulus jobs, the economic stimulus won’t have stimulated much. Here’s hoping that CIT finds a solution to its woes.