The private funding of CIT Group this week highlights once more how small- and medium-sized businesses, the backbone of the day-to-day American economy, are getting short shrift from the federal bailout and economic recovery programs.

CIT Group, Inc. is one of the nation’s prominent lenders, supporting more than 1 million small- and medium-size businesses, including some 2,000 vendors providing some 300,000 retail stores with merchandise. During the financial meltdown CIT continued to provide loans and financing to keep American small businesses running when the major banks hoarded their emergency bailout funds, and severely curtailed or ceased providing loans and financing to small businesses altogether. Now, faced with possible bankruptcy, CIT is about to secure a rescue loan from its existing bondholders.

Isn’t this how these things have been going all along?

  • The big super-corporations get bail-out loans, but local community small businesses can’t get bank lines-of-credit or short-term bridge loans to stay in business.
  • The big mortgage lenders get a helping hand as a reward for their bad decisions, but at the same time small businesses are closing, and their now-unemployed workers and owners lose their homes through mortgage foreclosure.
  • The CEOs and financial wizards who precipitated the crisis are squabbling over salary and bonus packages larger than some communities’ entire annual budgets, yet unemployment is at its highest rate in a century.
  • Some of the huge manufacturing industries, which employ less that 20% of American workers, get the big bailouts; meanwhile local, smaller companies, employing the vast majority of us, who provide us all with our daily product and service needs, have to resort to bootstrap financing to stay in business.

And now this. One of the few financial institutions that has continued to support American small- and medium-sized businesses is having to bootstrap-like finance itself, having been denied similar emergency financial assistance by the federal government. And there is no guarantee that the loan from current bondholders will be enough. As lack of financial support programs forces more local businesses to fail, the liquidity squeeze tightens on CIT. If CIT fails, then more local companies will be forced out of business. A bad downward spiral. In her What if CIT Group fails? post, Candice Choi looks at the implications. Other analysts fear a CIT failure will have a disastrous, major ripple effect throughout the entire retail economy.

If the economic recovery is going to happen anytime soon, the government, the top-level financial institutions, the investors and the holders of the wealth of this country are going to have to stop giving our small businesses short shrift.

Steve Lange
Senior Editor
Palo Alto Software