CIT Group collapse would threaten small business credit, financing

With the liquidity crisis facing small business lender CIT Group - leading many to speculate on the potential of a collapse - many small businesses are faced with losing their business lines of credit.

CIT Group has been the nation's leading SBA 7(a) lender for the past nine years, but has seen its lending ability plummet in the last nine months. According to the New York Times, it posted a $633 million loss in 2008.

CIT announced it is "in active discussions with its principal regulators on a series of measures to improve the company's near-term liquidity position," and the Times has reported that the group hired a law firm that specializes in bankruptcy.

As the bank is smaller than other financial giants who have fallen before it, a collapse may not pose a "systemic risk," experts say. However, having, according to the Times, CIT's bankruptcy would likely be a serious problem for small businesses.

"The CIT crisis takes a lending source that's been relatively active in a very tight credit market and eliminates one more source of capital," Ken Gaebler, president of Gaebler Ventures LLC, told the news provider. "Everybody we talk to says [that] despite anything you heard about stimulus programs loosening credit, people are very shy to make business loans."

In the case of a collapse, many small businesses would likely turn to alternative lenders for their business financing, as traditional banks are continuing to tighten credit and increase restrictions to minimize their risk.