So much can happen in a week. Or rather, 10 days. On July 12th news broke that CIT Group Inc., a major bank loan supplier to over a million small to mid-sized retailers and suppliers particularly focused in the fashion industry, was about to run out of money. CIT, which some estimate controls 60% of the apparel factoring market, was on the brink of filing for bankruptcy. On July 15th, the New York Stock Exchange halted trading on shares of CIT.
In a combined effort, the National Retail Federation, American Apparel & Footwear Association, Council of Fashion Designers of America, and the National Counsel of Textile Organizations, among others, sent letters to Congress asking for bailout funds for CIT. However CIT was denied a bailout because it was deemed by the decision-makers doling out the bank bailout funds that CIT was not too big to fail. What this meant for suppliers and retailers over the last week was a major panic that they would soon have to shut their doors, which in essence would be detrimental to the fashion and retail industry in the United States.
To back up a bit, CIT supplies what’s called “factors” or loans, many of them to businesses in fashion. Factoring are loans that keeps businesses afloat while waiting for sales. So basically, stores make orders and pay off these orders as sales of the items begin, but in the meantime, they operate often on loans from CIT. CIT also supplies money to the suppliers to float during the time of making goods before they’re sold. Many in the fashion industry depend on CIT to keep cash flow flowing, so if they’re gone, then businesses across the nation would start to close (even faster than many already are).
News of CIT’s troubles hit Reuters, CNN, AP, Bloomberg, Wall Street Journal, and of course local fashion titles such as Apparel News which kept a running tab on the situation over the last weekend. Then on Monday, July 20, CIT Group announced that is had reached an agreement, albeit short-term, with many of its bondholders for $3 billion. In a statement released by CIT, the money is “intended to provide CIT with liquidity necessary to ensure that it’s important base to small and middle market customers continues to have access to credit.” However many of these businesses question whether this will be enough to solve a major national problem.
According to a recent report in Apparel News, Attorney Gregory N. Weisman, a partner and chair of the apparel-practices group at Silver & Freedman in Los Angeles, described the $3 billion loan as “a band-aid.”
“It’s wonderful news but it is a short-term solution,” he said. “This CIT financial scare caught a lot of people off guard, it made a lot of people nervous and they are now exploring their options. Some of those options are changing factors entirely; changing to a dual-factoring format that permits multiple factors and spreads risk. It will be curious to see whether CIT changes its business model to mitigate against this situation in the future. Remember, a factor usually acts as the lender, bank and cash register for a business. It’s one thing if a lender refuses to lend, it’s another when the bank shuts the doors and refuses access to your own monies, and it’s yet another when your customers are contractually obligated to keep sending payments for your goods to the same people who say you can’t have your money. Scary stuff, indeed.”
Stay tuned for more on this story as we follow how the effects of the $3 billion loan works out over the next few weeks.