The collapse of the CITI Group, known for being a major small business lender seems almost inevitable, after the company’s admission that government’s additional help may not be forthcoming. The Main Street fears the government is unaware of the role played by the company in economy. The government says CITI is not that large a company to fail, which appears to be true if one goes by numbers alone. The argument that CITI is important to economy, however, holds water and that’s probably the reason why retailers associations are urging the government to help CITI handle the liquidity crisis.
What Led CIT To Reach Where It Is?
The reason why CITI got involved in the liquidity crisis is quite complicated. The company was directed towards the risky subprime mortgages and other loans which was a disaster waiting to happen. CITI has announced eight consecutive quarterly losses, and rest of the year is likely to be no different, according to a survey. The commitments of the company are only $1.5 billion which is very small amount when compared to giants that have received the government bailouts. The role of CITI becomes important when we take into account the small businesses it lends to, who cannot get access to usual funding routes.
Cash Flow Matters
Every business owner knows how much cash flow matters in all the businesses. Whatever your requirement, be it bill payment, buying stocks, or simply paying salaries, you can go to CITI with a need, and exchange your receivables for short term credit. A large percentage of CITI customers are small business owners who vouch for the company’s unique ability to work with new and small businessmen. If the CITI is allowed to fail, suppliers would be almost forced to stop supplies, or retailers will have to pay upfront at a time when it’s extremely difficult to get credit. Put simply, the small business owners would not have any option left, that too during an important holiday season, when the retailers expect to do half of their annual business.
Bankruptcy May Set Off Chain Reaction
Many big players in the SBA lending business, including Comerica, Banco Popular, and UPS Capital have already stopped operating in the sector. Other lenders such as PNC and Wells Fargo have also tightened lending norms. In this situation, when CITI goes bankrupt, the small business owners would become creditors because their invoices are held as collateral with CITI for lines of credit. Some estimates suggest about 300,000 small businesses would also go bankrupt with CITI. Some analysts believe bankruptcy is not going to help CITI Group Inc in the long run, and that only hope for CITI is after a short period of government support, some large corporation may come to buy it.
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