Community Banks Step In for CIT Group

CHICAGO ( TheStreet) -- How jaded we've become.

Once, the idea of a multibillion-dollar company going bankrupt would have sent the stock market into a panic. Now, we simply shrug our shoulders and wonder who'll be the next to fall.

This week, CIT Group ( CIT) became one of the largest corporate bankruptcies in history. The $71 billion bank holding company has nearly $65 billion in liabilities, and the bankruptcy is being spun as a reorganization -- a chance to refinance debt obligations and come out leaner and stronger.

The fact that the company's major debt holders support the plan was seen as an encouraging sign, as was the company's prediction that the fast-tracked process would wrap up by the end of the year. CIT had been struggling for a while, along with practically every other financial company. The bankruptcy announcement was news, but hardly earth-shattering.

One group, however, seemed particularly vulnerable to the change in CIT's fortunes. CIT specializes in servicing small and mid-sized businesses. With CIT in trouble, would financing for small businesses be that much harder to find?

Not necessarily.

CIT's troubles are certainly bad news for the businesses that count on it for financing. Its small-business lending division is the country's leading provider of Small Business Administration loans, and thousands of small manufacturers depend on its factoring services, which provide the funding for them to supply goods to large retailers. Such financing arrangements are especially crucial now, in the lead-up to the holiday season.

CIT has rushed to reassure its current customers that business will continue as usual. "Our plan of reorganization is not a 'free-fall' filing or a liquidation of our assets," the company said in a statement to customers. "CIT is continuing its operations and is not going out of business."

But CIT will not be taking on new customers for the foreseeable future. That means countless small businesses have lost a major financing resource, even as large banks such as Citigroup ( C) or Bank of America ( BAC) have cut back dramatically on new loans.

But that doesn't mean small businesses that want to expand have no other options. According to the Small Business Administration, lending has increased dramatically in the second half of the year. Since the economic stimulus package went into effect in February, the average number of loans approved each week has grown by more than 50%. In September, almost $2 billion worth of loans were approved, the highest single-month dollar value since August 2007.

With large banks focused on paying back their TARP money or negotiating year-end bonuses for the executive suite, smaller independent banks have stepped in to meet small-business needs. According to an analysis of FDIC data by the Independent Community Bankers of America, community banks with less than $1 billion in assets were the only segment of the banking industry to show growth in net loans and leases in the second quarter of this year.

"The vast majority of community banks are well-capitalized and have plenty of liquidity," says Paul Merski, senior vice president and chief economist of the Independent Community Bankers of America, which represents about 5,000 of the estimated 8,000 community banks across the country. "We're transitioning back to the traditional model of local deposits funding local lending."

That's not to say smaller banks haven't been affected by the broader economic climate. "Regulators are cracking down, and credit scores have gone down across the board," Merski notes. The slumping real estate market has also affected small-business owners, who often use their homes or workplaces as collateral. "With real estate down by roughly a third, those borrowers have less to offer as collateral," he says.

Lending criteria have gotten stricter, and entrepreneurs may find themselves jumping through more hurdles to get approved. Now more than ever, it's crucial to show your ability to grow sales and pay back the loan. Lending to small businesses remains a risky proposition, and lenders -- no matter what their size -- need to be wowed before they'll say "yes."

And that's not a bad thing. When times were flush and loans were handed out with little more than a signature, bad debt ended up crushing us all. Higher lending standards result in better loans and stronger businesses. If you have a compelling vision, you can still get funding, as long as you're prepared for a hard sell.
Elizabeth Blackwell is a freelance writer based in Chicago. She is the author of Frommer's Chicago guidebook, and writes for the Wall Street Journal, Chicago, and other national magazines.