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Century-old finance company commits $500 million to small business loan program

By KEN TARBOUS

December 15, 2009

CIT Group Inc., which emerged from its 38-day bankruptcy last week, said it would commit $500 million to its small business lending program for government guaranteed loans.

Judge Allan Gropper of the U.S. Bankruptcy Court in Manhattan approved the company’s prepackaged plan last week. The loans will be targeted to middle-market companies — a segment of the economy that has seen a dramatic drop in lending amid the credit turmoil.

CIT, a century-old lender to midmarket companies, emerged from bankruptcy, having shed $10.5 billion worth of debt.

Under the reorganization plan, CIT’s old common and preferred stock was cancelled and distributions of new debt and equity securities are to be distributed. CIT’s new common stock was listed on the New York Stock Exchange and began trading last week. The company’s non-reinstated debt will also be cancelled.

Shares of the newly-emerged CIT were changing hands at $29.13 each on Monday, slightly lower from Friday’s closing levels. Prior to its bankruptcy, CIT shares were trading below $1 each.

Meanwhile, CIT will select a new board of directors, and — as previously announced — CEO Jeffrey Peek will step down at year’s end.

Small business owners who can’t get the cash they need from traditional banks are turning more frequently to asset based lenders. Smalls with no proven credit record can still get financing on the basis of their accounts receivable, existing inventory, equipment and even invoices. Unlike factoring, in which receivables are actually sold to another firm at a discount, in asset based lending, the business holds on to its receivables and repays the loan when it collects on them. That can be a lifeline in today’s tight credit markets, with banks not willing to take many chances.

But asset based loans do come with a few hitches. For one, borrowers pay higher costs. That’s because lenders must hire outside monitors to scrutinize a firm’s balance sheet. Then they pass on the expense in the form of higher interest than from traditional loans. Plus borrowers are required to submit business plans that show projected sales and future steady growth. “There is a lot more due diligence involved,” says Andrej Suskavcevic, CEO of the Commercial Finance Association. “The process to approve the loan is more rigorous.”

Asset based loans still represent only a small slice, about 5%, of the commercial lending market. But they represent a higher share of lending by small firms. The market grew 8% to hit nearly $600 billion in 2008 and is likely to hit $700 billion by 2010.

Companies considering asset based lending should seek out finance companies that specialize in their industry. “There are some companies selling snake oil,” warns Marilyn Landis, president of Basic Business Concepts, Inc., a Pittsburgh based financial services consulting firm. She suggests looking through trade journal advertisements and talking to customers, suppliers and even friendly competition. Before making any final decisions, ask the lender for referrals from previous borrowers.