Industry responds to CIT Group news
Staff Staff -- Casual Living, July 17, 2009
It’s a mistake to think businesses could easily move their lines of credit elsewhere, White said in an interview last week on CNBC.
“I think that is a systemic risk that I don’t think people understand," he said. "It’s very difficult for a business to move a line of credit, and when you have 10,000 businesses trying to move their banks simultaneously, it would be darn near impossible.”
White also questioned whether the government fully understands the role a factoring company such as CIT plays.
“With factoring, you are assigning your receivables to the bank and they are guaranteeing that they will get paid.
“Look at it like a big credit card,” White said. “You go into the store and pay by credit and the store gets its money immediately and you don’t pay for 30 days. It’s the same thing, but for business, you take your receivables and give them to CIT, which guarantees the credit because they know the people you are selling to.”
White said he is fortunate because in addition to CIT, his company uses other banks and another factor. But he said that there are many businesses that rely solely on CIT.
He said that a manufacturer relying on a factor like CIT turns its receivables over to the lender and gets paid right away. “That is money they use for their entire cash flow,” he said. CIT then collects money from the client’s customers.
Asked if he was suggesting that a potential demise of CIT might cause a wave of small businesses failures, White said, “Bingo. You nailed it.”