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Troubled CIT is part of the garment industry's fabric

Clothing retailers don't pay upfront, so manufacturers rely on the big lender for loans and for guidance on which retailers are creditworthy.

July 18, 2009|W.J. Hennigan

The garment industry is tied in knots over reports that CIT Group Inc. could file for bankruptcy.

Scores of Los Angeles businesses in the apparel industry rely on CIT for upfront financing, which provides them with cash until retailers pay their bills.

Now that the New York commercial lender is on the brink of bankruptcy, local business owners are wondering how they'll get by. Many are scampering for alternatives to keep business moving.

It isn't that easy.

CIT spent years snapping up competition, which limits businesses' options. Compounding the problem, many smaller lending operations rely on CIT to vet borrowers. These firms' abilities to insure transactions would be hampered if CIT goes down.

"It's devastating," said Steve Barraza, owner of Tianello, a Los Angeles women's wear company. "There's almost nowhere to run. If we have another week or two like this, I expect you'll see a lot of businesses hitting the dirt."

CIT is a major provider of factoring services, which supply quick cash for businesses such as those in the apparel industry, where upfront costs for material and labor are significant.

Barraza, who does 60% of his business through CIT, said the finance company's troubles mean that other lenders know they have retailers by the throat. They can tack on extra fees and raise rates because there are few alternatives.

"They got us in a pinch," Barraza said. "Everybody's scrambling for a factor and they know it. Without CIT around, there's no reason for them to be competitive with their rates."

The factoring industry charges financing rates of 20% or more.

Here's how it works: An apparel business will get an order from a retailer for, say, $100,000, but the retailer does not pay in advance. Instead, a factor comes in and gives up to $80,000 to the apparel manufacturer so it can continue to pay workers and buy material. The factor also takes the hit if the retailer doesn't pay.

Under the arrangement, the retailer pays the factor, which holds on to the remaining money. The factor pockets fees and rates, which -- all told -- hover around 2%. Like a bank, the factor keeps the rest of the funds, which the manufacturer can withdraw or leave with the factor so it can mature with interest.

The arrangement is especially appealing to small and medium-size companies because factoring firms can be easier to deal with than banks, businesses say. Banks typically request a library's worth of documentation to get a short-term loan -- especially in the current economy.

Without the access to cash that factoring firms provide, the cogs of the apparel business seize up. "The industry is really fluid," said Michael Rosen, president of Michael Stars, a women's wear company based in Hawthorne. "Cash is the lifeblood of every company."

Factoring firms also research retailers and tell manufacturers whether the retailer has the ability to pay them back on time. Such information is essential to any transaction, Rosen said, and can be particularly difficult to unearth on small specialty stores, which buy most of Michael Stars' merchandise.

CIT did that digging for about 60% of Michael Stars' sales, said Rosen, who worked as a CIT account executive for eight years. Rosen said he might take on some of the credit management himself if CIT collapses. "The future of factoring is very much in question," he said. "They've been the major player for a long time. It's hard to believe that another company will fill CIT's shoes."

Continental Business Credit Inc. is a factoring firm for smaller manufacturers. Vince Lionetti, a partner at Continental, said businesses usually come to his firm before moving on to a bigger one such as CIT.

Rather than seeing CIT's fall from grace as a benefit to Continental, Lionetti said it puts his firm at a disadvantage. Continental "heavily relies" on CIT to operate, using its vast research information database when insuring businesses.

"CIT has the pulse on the apparel industry," Lionetti said. "If they fall into bankruptcy, it puts a dent into our ability to do business like we did in prior years."

Other factoring firms, such as New York-based Rosenthal & Rosenthal Inc. and Milberg Factors Inc., will be inundated with new opportunities, said Jeff Van Sinderen, a retail analyst with B. Riley & Co., a Los Angeles investment firm.

"There are a lot of businesses looking for factors right now," he said, "many who will have disastrous cash flow issues if CIT goes under."

David Reza, senior vice president and partner at Milberg, said that the number of business inquiries had spiked "several-fold" in the last week but that the company is not taking any pleasure in CIT's misfortune.

Lonnie Kane, president of women's sportswear business Karen Kane Inc., said the Vernon manufacturer has 98% of its business with CIT.

About two weeks ago, Kane, a 35-year veteran of the retail business, saw a problem developing and drew down a significant piece of his $10 million in financing.

"I'm an old dog and I've had to learn new tricks," he said.

Kane believes that even if CIT files for bankruptcy, the factoring business will be sold off or emerge again.

"They'll be back one way or another," he said. "They're too big of a part of the industry."


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