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Government Should Take Steps to Keep CIT Group Solvent

WASHINGTON, July 14, 2009—The International Franchise Association is urging the Obama Administration to take immediate action to support small business lending activities by commercial banks. 

Noting that the crisis facing CIT Group Inc. is just the latest symptom of the severe credit crunch affecting franchised businesses, in a letter to Treasury Secretary Timothy Geithner, IFA President & CEO Matthew Shay said that CIT may appear too small to merit “too big to fail” consideration by the Treasury Department, but that in fact, CIT plays a critical role for small business borrowers nationwide and steps should be taken to keep it solvent. 

“Providing critical assistance to a substantial SBA lender such as CIT that has had positive lending outcomes seems a prudent use of government assistance during this challenging time,” he said.  “We believe that a program of broad federal support for increased franchisee borrowing will result in a significant benefit to the U.S. economy.” 

Shay said the volume of CIT small business lending is down dramatically this year, and the industry is concerned that allowing CIT to enter bankruptcy will send the wrong signal to small businesses on Main Street, noting the market withdrawal of many other lenders has left borrowers with few remaining options.
As the economy has deteriorated, Banco Popular, Comerica, and UPS Capital have all vacated the SBA lending business nationally (in 2008, these banks were ranked numbers six, nine and ten respectively in the small business lending marketplace).  GE Capital, another historically active lender in the small business and franchising markets, has halted virtually all franchisee lending. Banks, such as Wells Fargo and PNC, have also cut back on their lending to franchised businesses and tightened lending standards significantly for the loans that they are willing to make.  Since 2000, CIT has been the largest originator of SBA-backed franchise loans and was responsible for $766,568,550 in small business loans in Fiscal Year 2008.

Shay said that a recent IFA report demonstrates how critical access to financing is to the growth of franchise business.  For every incremental $1 billion of lending to franchisees, 34,100 jobs and $3.6 billion of additional economic output are created.

“We believe that one of the fastest ways to kick start the American economy into a sustainable recovery is to target categories of businesses that can create and sustain the most jobs, such as franchising,” he said.  “Franchising grew nearly four times faster than the overall economy in the four years following the last recession (2001-2005).  Economic downturns often lead to a strong infusion of human capital in franchised businesses as workers affected by corporate lay-offs are looking to start their own businesses. The only missing element this time is access to capital.”

IFA outlined several steps the Administration and Congress should consider to make it easier for entrepreneurs to access capital and create jobs:
• Create of a federal program to facilitate the syndication of franchisee loans (perhaps using the TALF as a model). 

• Increase the standard SBA 7(a) maximum loan limit from $2 million to $4 million and increase the maximum guarantee amount provided to $3.6 million.  The economic downturn has resulted in borrowers having less collateral due to declining home values and reduced investment and savings accounts.  Increasing the loan limit will allow more individuals and businesses to take advantage of the 7(a) program, expanding the job creation potential of the program. 

• Consider a market-based loan pricing model for the SBA loan programs.  The real issue for many small business borrowers is not as much the cost of funds as it is the basic availability of funds.  When SBA programs cap the interest rates that can be charged by lenders, the rules create a competitive disadvantage for small business borrowers.  Despite the best intentions of policymakers, market economics dictate that capital will not flow to markets that offer below market rates. 

“It is imperative that the Administration devote key resources to small business lending activities now, because these tools will result in job creation more quickly than other recovery and reinvestment initiatives,” Shay said.  “It is widely acknowledged that small businesses account for the majority of new job creation in this country, and the federal government should be empowering them with the tools to lead the economy out of recession.” 

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To view Matthew Shay discussing the impact of the CIT crisis on small business, click here.

About the International Franchise Association
The International Franchise Association, the world’s oldest and largest organization representing franchising, is the preeminent voice and acknowledged leader for the industry worldwide. Approaching a half-century of service with a growing membership of nearly 1,300 franchise systems, 10,000-plus franchisees and more than 500 firms that supply goods and services to the industry, IFA protects, enhances and promotes franchising by advancing the values of integrity, respect, trust, commitment to excellence, honesty and diversity. For more information, visit the IFA Web site at