Retailers fear CIT failure could ruin Christmas shopping season
Filed under: Company News
While many people expect a slow Christmas selling season thanks to the recession, retailers fear the situation could be even worse than expected if CIT Group (CIT) is allowed to fail. The fear is based on the fact that CIT caters to apparel and furniture manufacturers -- two of the hardest hit areas -- that typically need long lead times to produce goods and have high manufacturing costs. Retailers place orders for their fall and winter merchandise right now. Without the cash they normally get from CIT, suppliers may not be able to buy the materials they need to produce goods. Retailers worry that without goods to sell there won't be a chance of recovery during Christmas -- the best selling season of the year.
CIT's role in all this is that when stores place orders for merchandise they do it on credit and have two to three months to pay the bill. Manufacturers raise cash to buy the raw materials they need by selling these IOUs -- a process called factoring. Without that needed cash, suppliers just won't be able to buy the raw materials and store shelves could be emptier this Christmas season.
In an internal report released earlier this week, CIT said that about 760 manufacturers and 3,000 retailers would be hurt if funding was not found. While large consumer products companies get credit directly from banks, small businesses must turn to companies like CIT, which is the largest funding source for many small businesses.
Franchisers also fear a loss of credit if CIT fails. Dunkin' Donuts told The Washington Post that CIT would rip a hole in the industry if it fails. Franchisers would not be able to get the money they need to open new stores or expand operations.
A New York bankruptcy attorney, Jerry Reisman, reported to the Post that he's gotten more than two dozen calls from panicked stores and apparel manufacturers. Some of the companies say they may not have the money to pay employees as early as today. "They are unbelievably concerned right now," Reisman told the Post. "What we may have here is a total disruption of small business."
With credit markets frozen and the big banks not lending, small businesses have nowhere to turn but to companies like CIT to raise the cash they need to continue operations. While some call CIT a loan shark for the interest rates it charges small businesses, others think of it as their only lifeline.
CreditSights indicated yesterday in a research not that CIT needs about $4 billion to $6 billion to continue operating. Some reports indicate that bondholders are considering restructuring CIT's debt from short term to long term debt to give the company more time to raise the cash. That restructuring may be CIT's only chance of avoiding bankruptcy.
Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies.
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Reader Comments (Page 1 of 2)
7-17-2009 @ 10:31AM
Iridium said...
"CIT caters to apparel and furniture manufacturers -- two of the hardest hit areas -- that typically need long lead times to produce goods and have high manufacturing costs. "
You are kidding right? Do you know anything about the apparel industry or the furniture industry?
Both of these industries have some of the highest margins of any product in the world. SO high in fact that retailers can mark these products down 75% and still make money.
The average $2000 couch is produced for less than $300, and that is in the USA. A $75 shirt is produced for around $5 overseas. Apparel lead times are the same as everything else, in fact shorter than electronic goods. 60 days out.
What is hurting retailers is that in the recession they can not sell these items for list price which is hurting thier bottom line due to being publicly traded corporations. Serves them right for selling something they pay less than $10 wholesale for $75. Profit margins for many retailers are obscene. They then used these obscene profit margins to leverage thier business, often times over 100:1. As long as people kept buying, all was right. The problem is that the money supply that was leveraged out didn't really exist.
The reason why we are in an economic downturn is because the ability for many corporations to continue to generate obscene profits through the real economy has vaporized. Corporations that can manipulate thier way to obscene profits, like the banks and Goldman, have done so in order to manipulate thier share price. These corproations manipulated the bubble and the downturn in order to rake in massive profits. If you look at the market over the past few months that is exactly what you see. Corporations that have no business bringing in the profit they did, yet somehow brought in even more than expected.
Almost every corporation in the USA has become too large for its own good. Todays corporations dwarf the monopolies of the late 1800s and th eearly 20th century. You are talking about $200 billion corporations today with enough power and influence to control the most poweful government in the world.
If we don't take down every major corporation in the USA our country is doomed. The administration and the corporations that control it want the USA to become a 3rd world nation. They will move on to China and create what they did in the US. Only this time they have over a billion people to play with. The rich few who control everything can generate fortunes in the trillions rather than billions.
That is the goal and that is the endgame being played.
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7-17-2009 @ 12:31PM
allan said...
One's lack of comprehension is astounding. Comparing retail mark ups to manufacturing needs....sometimes one should read more carefully!
$75 tees...how about $8 tees?
This letter that I refer to shows the limitations of most people online!
7-17-2009 @ 1:24PM
T.R. said...
YOU ARE NUTS!! TYPICAL FRUSTRATED LITTLE GUY SEEING CONSPIRACIES AND
HOBGOBBLINS EVERYWHERE.
7-17-2009 @ 2:21PM
Peter Nowotny said...
What causes an economic downturn? What causes a recession? What causes wars? Only governments causes all the above. In a free market society regardless how greedy certain companies are it will never turn into turmoil. Government had some success blaming Wall Street, Banks, Pharmaceutical, etc just to justify their own shortcoming. What happened when Easter Airline, Braniff, ATA, TWA, PAN Am went defunct nothing really happened. It is not what government can do for us; the question is what government has done to us?
7-17-2009 @ 7:07PM
william neisler said...
I don't think you anything about furniture business. Margins of domestically made furniture are very low. Cities here in North Carolina like Hickory, High Point, Lenoir,Lexington, etc. have an average of 18% unemployment. That's right, 18%. CIT going under will destroy small family businesses here in North Carolina. Washington did everything to bail out Wall Street, what about Main Street !!!!!!
7-17-2009 @ 1:48PM
Menders Mutcali said...
CIT and Other factoring companies like them nothing but loansharks they dag their on graves burry them>Look whaat happened to AIG bail out ??????????????
bIG f##@#@#ING FIASCO!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Why keep making the same mistakesZ........
by the way who is going to bailout the small businesses????????????????????????????
I ll say let them save themselves .
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8-12-2009 @ 1:29PM
LurMkr said...
Menders,
MAN! You've certainly got a VERY NARROW point of view!
I agree with you somewhat ~ because that's exactly what I've been trying to do, for the last 16 months!
So far, we're still in business, and I haven't had to let any of my staff go ~ yet! BUT, there's only so much that anyone can do, to keep their business solvent!
You see; I'm one of those small-manufacturers, that you'd have "bail themselves out".
A manufacturer doesn't really have that much of a mark-up on his products. A manufacturer's average PROFIT, after all expenses are paid; is usually in the neighborhood of 5% to 7.5%.
FYI: Our products' prices, are marked-up between one to three times, before you ever see, or put your hands on them!
Do you have any idea at all, how we small-manufacturers REALLY have to bail ourselves out?
1st. By cutting our manufacturing-costs to the bare-bone!
2nd. By selling off products we've already manufactured, AT or BELOW what it actually cost us to make it.
3rd. By selling off some of the specialized equipment we use to manufacture our products; and asking our employees to take a reduction in pay.
4th. If THAT still isn't enough ~ by laying off some, and then ALL, of our workers ~ at least until we can "break-even" again!
AND LAST ~ by selling whatever is left of our business!
The banks, though they're supposed to be making loans to help out small-businesses ~ aren't ~ even with a good credit rating & 2:1 collateral for the loan!
So, I'm already at step #2; and beginning to look for still-solvent manufacturers in the industry, to begin step #3.
My staff has already agreed to a pay-reduction, beginning this week; but we're still reluctantly looking at the possibility of having to go even further.
Unlike management in big-businesses, or even some of the owners of larger-sized small-businesses; I haven't drawn a paycheck since May ~ just so I could keep my employees & still make payroll. During the 15 months before May; my salary (for a 70-hr+ work-week), had been $5-a-week more, than my highest paid 40-hr-a-week employee. Obviously, I haven't been living "high-off-the-hog"!
Right now, my savings-account is getting down to next to nothing, and I'm just plain running out of options! After almost four decades in business, I'm seriously considering closing my doors, forever!
I'm not looking for any kind of a "bail-out" ~ but a 60-month SBA-loan, sure would be nice!
7-17-2009 @ 1:47PM
SBA borrower said...
Here's another little twist: If consumers don't have any money to buy said goods at Christmas time there won't be any recovery as well. But I feel much better after listening to VP Biden tell the AARP yesterday that we need to spend more to avoid going bankrupt. He sounds just like a corporation talking "Damn the balance sheet, keep making acquisitions!" I hope POTUS Obama lives through his term (singular); I'd hate to have Biden as POTUS.
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7-17-2009 @ 1:59PM
alan said...
Lots of morons on line today! Business needs capital to survive. No calital, no business. Many right wing nuts here too. Find a life or get a job. I have one!
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7-17-2009 @ 2:16PM
john said...
Reply to Iridium
I own a furniture store and and wish you could tell me where I can buy a $300 sofa that I can retail for $2000. Please tell me where I can buy a $300 sofa that I can sell for $1000. You are sadly mistaken about markups in the furniture business and the expenses to stock and retail furniture. I'm lucky if i can net 6% of sales as a profit at the end of the year and have been in the business for 30 years.
Again I would love to have the name of the factory that sells this sofa.
As far as Cit goes I keep hearing that small business runs america and have watched congress bail out the big banks time and time again. CIT affects small business and we need them to keep goods in our stores. Hate to see another bailout but with sales down small business is hurting which has caused CIT to hurt also. If we are going to spend money lets spend it to help small business not wall street.
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7-17-2009 @ 2:19PM
Duke said...
No more bailouts. This is another tactic to get taxpayer money. No more taxpayer money to keep businesses going that should file bankruptcy.
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7-17-2009 @ 2:20PM
cabo79 said...
Let the government take over CIT and roll it into the SBA. We have Farm Credit because farmers could not raise money through the banks. We need something similar for small and mid sized business. There is no way they will get financing through banks. Sometime I think the government wants only mega businesses to survive.
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7-17-2009 @ 2:22PM
cabo79 said...
The only way to end this BS is to go to term limits. You cannot have a Free Society without rules, laws, a police force to catch the bad guys and prisons to put them in. The same goes for a Free Market capitalist society, you have to have rules, regulations, a police force and prisons to put the bad guys in. Our government is not maintaining a Free Market. Too many political contributions (pay-offs), it is obvious laws are bought and sold. Folks we need to correct this, it happens over and over. Our government is paralyzed by the need for pay-offs (political contributions). We need a major change to end this professional politician form of government. We need TERM LIMITS and real campaign finance reform. How about three 4 year terms for Congressmen, two 6 year terms for Senators, and keep the current two 4 year terms for President. The most you can serve in the Senate and Congress combined is 14 years. We need an end to the professional politician form of government.
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7-18-2009 @ 8:46AM
Paulio said...
I agree with term limits, but I would shorten them even more. Next cut out congressional pensions. Next I would push campaign reform by eliminating elections. People are appointed to congress by lottery. There will have to be a list of qualifications to make it, but that is the ONLY way we are going to get fair representation in our country. No big corporation will know who is coming to office until they arrive. Next make it illegal to lobby. We have to purify congress and make it representative of our nation not the rich and not lawyers.
7-17-2009 @ 2:31PM
mark brennan said...
The government bails out Wall Street and other companies that are TOO BIG TOO FAIL.
CIT is a factoring bank that many small businesses like myself borrow money against retail purchase orders.
I guess that Washington has decided that CIT and there small business customers are not worth saving.
It is a sad day in America. We had George Bush that was pathetic and now we have a president that wants to solve every problem in one year but does not have an adequite budget to do so.
In my business I would like to expand by 300% but I do not have the financial resources to do so. The US government does not have the financial resources to accomplish what they want to do.
An old expression. The butt of a canary and the appetite of an elephant. This describes our government today.
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7-17-2009 @ 4:10PM
steve said...
CIT is in trouble just like the other banks because of the sub prime mess.
Now who they lend to will suffer. It's a chain reaction down a long long line. They all jumped in to claim their take. They all jumped into a snake pit but they did not see what was at the bottom of that pit unitil it was to late. Greed. It sometimes bites back.
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8-01-2009 @ 11:44PM
Kirk said...
Alot of major companies are failing because of lack of need for the products and services being offered. People are looking for ways to save money,not spend it. That's why our company is thriving like never before during these tough economic times because of a great way to create additional income. We have one of the greatest income opportunities ever created. Ordinary Americans now have a Legitimate way to save money, make money and create wealth. www.fdirep.com/kboone was the best Opportunity I've ever taken advantage of.
7-17-2009 @ 4:28PM
Donovan said...
Going to the shopping malls is all well and good. However, the trend for the past several Holiday shopping seasons, seems to geared to more on line shopping. I can find any item I'm looking for at any store that advertises on line. I'd much rather pay a shipping charge, as opposed to driving from store to store, and schlepping gift filled shopping bags. Its the same old song and dance every year, The retailers start bit#hin and moaning, that sales will be down. Now their gonna bit#h their credit lines are hampered due to CIG. Well if you think your sales are gonna be that slow, why over purchase and over stock (in store) merchandise that may not sell out in the first place. As a merchant, you can always place a rush order with your vendor if necessary, if you do have a few hot selling items, you need to restock.
If the merchandise your selling, is priced right in the first place. Your merchandise will sell.
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7-17-2009 @ 4:57PM
ray said...
with intrest they get let them bail them selfs out. they do not need any money
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7-17-2009 @ 6:18PM
marsha said...
Christmas shopping?????? are you joking, who will be able to afford it with obama and pelosi bankrupting us?
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