Banks, Money and the Toy Industry

Have you heard of CIT? If not, maybe you should. Why, because CIT is the major lender to small and mid-size businesses and CIT is in danger of going bankrupt. The Obama administration wants to take a stand on bailouts and CIT is not getting any more government money. I don’t know the politics of it, but it is, at least for the consumer products industries, some potentially very bad news.

We need CIT. They provide factoring to the manufacturers who sell to Wal-Mart, Target, Toys R Us and other large retailers. When a bank engages in factoring, they are giving the manufacturer immediate access to the money they would have received had they waited the 30, 60, 90 or whatever number of days they had given the retailer to pay the invoice. By getting access to money immediately, tmanufacturers preserve their cash flow and are able to finance and build more inventory.

Here is how the President of the National Retail Federation put it:

"A failure of CIT would impact thousands of retailers and, consequently, the consumer spending that makes up two-thirds of our nation’s economy. That cannot be allowed to happen at a time when retailers are already struggling to survive the national recession."

There are some mitigating circumstances. First of all, CIT is not the only lender engaged in factoring, they are just the biggest. The situation would eventually correct itself but this Christmas selling season would take a hit in the form of drastically depleted inventories at store level. Secondly, retailers are being cautious this year about their inventories so demand is not the same as it has been in past years. This could blunt some of the problems deriving from a CIT bankruptcy.

CIT is trying to raise capital but its ultimate fate looks very questionable. Keep up to date on this one. It is important.