Hopes that the US government would hand out emergency federal assistance to CIT Group Inc, a major source of financing for small and mid-size apparel firms, have been dashed after talks ground to a halt yesterday (15 July).

The New York based company now says there is no likelihood of additional government support in the short term - leading to fears it will be forced to file for bankruptcy.

As the largest factoring firm to the apparel sector - responsible for an estimated 60% of factoring in the US apparel and footwear industry - the disruption caused by a bankruptcy filing could have a crippling impact on manufacturers and retailers.

The company's clients are thought to include retailers Bon-Ton Stores Inc and Burlington Coat Factory as well as suppliers like denim brand Joe's Jeans.

Not only would they instantly lose credit approval for customers as they enter the critical months of the autumn shipping season, but they would also be unable to find funding to make payments to overseas manufacturing facilities.

To make matters worse, the demise of CIT would also further weaken the overseas market's confidence in the US economy and their ability to obtain timely payment for previously contracted goods.

Financial lifeline
The practice of factoring has become a lifeline to many small and medium-sized firms as bank lending has dried up amid the global financial crisis.

And CIT has been at the heart of the business, acting as a "factor" for thousands of vendors who supply US retailers with much of the merchandise sold in their stores.

The financial transaction begins when vendors typically accept orders from retailers with an agreement to be paid in 90 days.

They then sell their accounts receivable (invoices) to a factor in order to obtain the immediate short-term financing needed to produce the goods ordered.

Without factors, suppliers could be forced to shut their doors or retailers would be required to pay up front and draw down on their own credit lines at a time when credit remains difficult to obtain, the National Retail Federation says.

Federal bailout hopes
CIT, which has been in talks with federal regulators all week, had been hoping to benefit from a Federal Deposit Insurance Corp programme that would guarantee the lender's debt.

This would have been on top of the $2.33bn already granted to keep it afloat in December under the Treasury's Troubled Asset Relief Program (TARP).

It has also been looking at transferring assets and its Vendor Finance and Trade Finance businesses into CIT Bank in an effort to boost its liquidity.

Its case was backed by several US trade groups who sent a series of letters to Senator Christopher Dodd, Representative Barney Frank, and Treasury Secretary Timothy Geithner highlighting the pitfalls of allowing CIT to enter bankruptcy.

Kevin Burke, president and CEO of the American Apparel & Footwear Association (AAFA) said the end of discussions was "deeply troubling."

"In a time when the US 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." 

He added that the availability of credit and cash flows is key at a time when the industry's busy shipping season begins and holiday orders are placed.

Likewise, National Council of Textile Organizations (NCTO) president Cass Johnson said the loss of factoring and loan instruments from CIT "could put many textile companies and their suppliers out of business."

He added: "Many manufacturers are running on survival mode right now - a major disruption in financing and factoring would be enough to put many of them under."

Where the industry goes from here is unclear.

Factoring options are not only hard to come by, but few other lenders are large enough to be able to absorb CIT's business and may not be able to buy those receivables currently held by CIT. 

Some, too, haven't yet ruled out hope for government assistance for CIT.

"CIT is most certainly too important to the retail industry to be allowed to fail, and the retail industry is too important to the economy to be placed under additional stress," NRF president and chief executive officer Tracy Mullin said.

By Leonie Barrie.