For months the specter of the possible bankruptcy of CIT Group Inc., one of the country's largest providers of financing for small and mid-size business, has haunted the retail industry. CIT provides up to 80 percent of the factoring capital used by independent retailers and retail franchisees to purchase merchandise from manufacturers.

Over the weekend CIT's bankruptcy filing came to pass. But industry experts are hoping the timing and structure of the filing will blunt the impact on CIT's retail clients. Though the all important holiday shopping season looms, most retailers have already paid for merchandise and therefore aren't likely to be affected as CIT restructures, says Joe Alouf, senior managing partner in the San Francisco office of Eaglepoint Advisors, a turnaround and restructuring arm of Kurt Salmon Associates, a global retail consulting firm.

The bankruptcy is a pre-packaged deal, with an end-of-year deadline for the completion of CIT's restructuring efforts. For the time being, operations will proceed as normal, CIT said in a statement. What's more, immediately prior to the filing, CIT secured a $1 billion committed line of credit from investment firm Icahn Capital LP and expanded its $3 billion senior secured credit facility by $4.5 billion. As a result, CIT has assured its clients that their business won't be affected during the restructuring process.

After the restructuring, however, CIT, which was brought to its current position by too much debt, is likely to curtail its lending, notes Alouf. And that's when a lot of its retail clients might face difficulty finding alternative sources of funding. That could pose a lot of troubling questions and might force some weaker retailers out of business.

"What's going to happen is that a lot of the smaller and less credit-worthy players are not going to be acceptable to CIT in its new format," says Alouf. "That means they are going to have to find a replacement credit provider. It's probably going to take a while for those customers to find other sources of capital and they cannot survive without CIT. I think we are going to see that the weaker retailers are going to have significant disruptions to their business."

The difficulty of finding alternative sources of capital might be exacerbated by the continuing troubles in the U.S. banking sector, adds Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York City-based retail consulting and investment banking firm. Historically, regional banks have been among the main sources of factoring capital for small and mid-size retail businesses, but many of those banks are failing at an alarming rate because of troubled residential and commercial real estate loans.

This year, there have already been more than 100 bank failures, and hundreds more are expected to take place in 2010. Meanwhile, CIT's other competitors in the factoring business—firms including Rosenthal & Rosenthal Inc. and Sterling Factors Corp.—might not have the lending capacity to fulfill all the excess demand likely to be created by the combination of the CIT restructuring and the regional bank failures.

As a result, those of CIT retail clients who have been teetering near the edge of bankruptcy for most of 2009 might be forced to enter Chapter 11 in the early months of 2010, says Matthew Bordwin, national co-head of the real estate services team in the Melville, N.Y. office of KPMG Corporate Finance LLC. "I would suspect that come January, February, March, the outcome of CIT restructuring will have a material impact on [retailers'] ability to get funding. Those retailers that have avoided filing over the last couple of months—it's going to be really tough for them."

Because CIT's retail clientele is made up of smaller retailers and because the credit markets appear to be thawing, retail real estate professionals claim the impact on retail properties is going to be minimal. By the time the CIT restructuring is completed, debt providers that have so far been sitting on the sidelines might be ready to step in and pick up any leftover business, says John Bemis, executive vice president and director of leasing and development with Jones Lang LaSalle Retail, an Atlanta-based third party property manager.

Many retail consultants, however, are worried that might not turn out to be the case. "I think the question of whether CIT will continue to serve the needs of retailers has not been answered yet and the ability for retailers to get financing has been a real challenge over the last year," says George Whalin, founder of Retail Management Consultants, a Carlsbad, Calif.-based consulting firm. "If retailers can't get financing, the issue becomes how many retailers can survive without CIT and a lot of them can't. CIT finances a lot of guys with 10, or 20, or 40 stores and a lot of those retailers may be in malls."

—Elaine Misonzhnik