CIT Group feels cash crunch; small businesses may hurt

— -- In what could be a big blow for small businesses, one of their largest lenders is fighting for survival.

Neither the Fed nor the FDIC would comment, as CIT's stock fell 12% to $1.35. But in a sign of the potential problems facing CIT, rating agency Standard & Poor's downgraded the company, warning that it "may attempt to restructure its debt, perhaps in bankruptcy," and that CIT has more than $1 billion in debt coming due by the end of 2009.

With this downgrade to "CCC+/C" by S&P, the likelihood of CIT being able to access government help might have decreased further. FDIC Chair Sheila Bair made it clear in a recent statement that government guarantees for debt issuance are designed for "healthy" banks and "to relieve the crisis in the credit markets."

CIT problems stem from the fact that, unlike banks, it doesn't have a reliable source of funding such as deposits to raise money that it can turn around and lend. And its low credit ratings make it even more difficult for it to raise any money.

"CIT was very reliant on the credit markets, which are open to a very selective group of companies today," says Sameer Gokhale, an analyst at Keefe Bruyette & Woods.

The government gave CIT $2.3 billion in bailout funds in December. If S&P's concern proves correct and CIT is forced to go into bankruptcy-court protection, it would be the first to do so among financial institutions that have received taxpayer money in the economic crisis.

Despite CIT's troubles, federal regulators are under a lot of pressure to find a way to save the firm, because its demise would hurt myriad small businesses that are already strained financially. CIT has been the largest small-business lender for nine consecutive years, and many retailers and manufacturers rely on a line of credit from it to make payroll or pay vendors.