AFTER MAKING good on its three-month-long threat to file for bankruptcy protection on Sunday, CIT Group, one of the nation’s biggest small-business lenders, may re-emerge more willing to lend. But factors affecting the broader credit market could mean that smoother lending is still a long way off.

CIT’s bankruptcy plan, which won the support of 90% of its bondholders, is designed to reorganize the firm’s debt and lead it out of Chapter 11 bankruptcy by the end of the year.  Soon after that, the firm could begin issuing added loans and factoring deals to small businesses again.

“Hopefully, when CIT emerges, they will get back into the small-business lending arena,” says Molly Brogan, a spokeswoman for the National Small Business Association (NSBA) in Washington, D.C. “But we’re just in a watch-and-see mode right now.”

CIT remains optimistic. “The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small-business and middle-market customers, two sectors that remain vitally important to the U.S. economy,” Jeffrey M. Peek, Chairman and CEO of CIT, said in a statement.

However, one of the enduring lessons of the credit crisis may be that lending to small businesses has more to do with the larger economic recovery and the general availability of credit than the survival of a single lender.

Although the outlook appears positive for CIT’s small-business customers, access to credit will remain tight until the broader economy perks up, says Bill Dunkelberg, the chief economist for the National Federation of Independent Business in Washington. “Problem is not credit availability; it’s customer availability,” he says.

There have been some signs of a rebound. The economy grew at a 3.5% annual rate in the third quarter, and corporate earnings surprises driven by revenue growth suggest some sectors are recovering more quickly than expected. However, continued growth is needed for a return to lending and business as usual, Dunkelberg says. “Once purchases go up, more businesses will need loans to buy inventory and the like,” he says.

One problem is that many business owners no longer qualify for certain loans; their credit scores fell as banks tightened their lending standards and slashed or closed credit lines, Brogan says.

According to the Federal Reserve’s latest Senior Loan Officer Opinion Survey, 35% of domestic banks said they tightened credit for small firms in July, down slightly from more than 40% in April. (For our story on the status of small-business lending, click here.)

CIT's bankruptcy filing may be good news for small businesses in need of credit. The lender's filing will test whether a lender can survive the bankruptcy process, which poses risks for borrowers and investors. If CIT can resurface successfully, other troubled institutions may follow suit, says Dunkelberg, who also serves as chairman of Liberty Bell Bank in New Jersey.

Knowing what will become of CIT should bode well for businesses, says Robert Brusca, the chief economist at Fact and Opinion Economics, a researcher in New York. “It’ll be good to have CIT’s situation clarified. It’s [also] good to have that clarification come with the backstop of a new infusion of funds from Carl Icahn.” (Last Friday, billionaire investor Carl Icahn, who says he is CIT's largest debt-holder, agreed to support the prepackaged bankruptcy filing.)

Under the plan, CIT aims to transfer its vendor-financing unit and factoring operation, which provides upfront cash to vendors for their receivables, to its Utah bank. (CIT's core businesses, including its Utah state bank and CIT Bank, will continue to operate outside Chapter 11 protection.) In addition, bondholders will exchange a portion of their debt for equity, ensuring investor interest going forward and keeping bondholders from placing more assets on the chopping block.

CIT hopes to emerge with less debt on its books. According to the holding company’s bankruptcy filing, CIT has assets worth about $71 billion and nearly $65 billion in liabilities. If CIT succeeds in knocking out its obligation to shareholders -- and, by extension, U.S. taxpayers who foot the bill for a $2.3 billion bailout to the lender -- CIT will shave its total debt burden by about $10 billion. 

-- Write to Diana Ransom at dransom@smartmoney.com

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