Fashion houses fret over possible CIT bankruptcy

The potential bankruptcy filing of struggling commercial lender CIT Group Inc. is yet another whammy for the much-suffering fashion industry.

Nearly 60% of U.S. apparel and footwear businesses use CIT as a factor, according to the American Apparel & Footwear Association. Through a factoring agreement, lenders provide businesses with financing based on their account receivables. Ideal for a seasonal business cycle, factoring allows designers to ship orders from six months ago, while using advanced funds to fill orders for the next season. Without such funding from CIT, retailers currently taking orders for winter would not have sufficient credit to pay their costs.

It might not have an immediate effect on what theyre shipping today, but the orders theyre taking for six monthsall of a sudden there wont be any financing and they cant prepare letters of credit to overseas suppliers, said Vano Haroutunian, a partner at law firm Ballon Stoll Bader & Nadler, who has dozens of clients that use CIT as their only factor. Theyre very concerned and we fear some of those businesses will not be able to withstand the impact of CIT filing for bankruptcy.

CIT, which has over $1 billion in debt coming due by September, said Wednesday that the government will not give it another bailout, news which will adversely affect the 2,000 vendors to which CIT provides factoring services. The news sent the lenders shares plunging 75% to 42 cents in afternoon trading Thursday.

CITs clients include well-known designers like Trina Turk and Marc Ecko, who is struggling with his own financial problems, as well as smaller apparel and accessories vendors.

In a time when the U.S. apparel and footwear industry is experiencing the most gripping credit crunch in memory, I fear this may only further hinder any opportunity for economic recovery, said Kevin Burke, chief executive of the American Apparel & Footwear Association, in a statement.

Without CIT, many designers will be forced to shutter, or will no longer be able to produce the same amount of goods as in the past. The problem is expected to ripple down to retailers, who would face a merchandise shortage.

Lodis Accessories, a 44-year-old self-financed company selling at stores including Nordstrom and Rockefeller Centers Delfino, does not use CIT, but President Paul Diamond said some of his suppliers might.

If a manufacturer were to factor us, that supplier could no longer obtain credit and that would jeopardize our ability to obtain resources, Mr. Diamond said, noting that Lodis could switch manufacturers if such a case occurred.

Other companies might not be so lucky. Additionally, few other lenders provide the same level of factoring services as CIT; of those that do, none are large enough to take on all of the beleaguered companys businesses.

On Wednesday, the National Retail Federation sent a letter to the Obama Administration petitioning government assistance for CIT.

CIT is most certainly too important to the retail industry to be allowed to fail, wrote NRF president Tracy Mullin, and would impact thousands of retailers and, consequently, the consumer spending that makes up two-thirds of our nations economy.

Crain’s New York Business is the trusted voice of the New York business community—connecting businesses across the five boroughs by providing analysis and opinion on how to navigate New York’s complex business and political landscape.