July 17 (Bloomberg) -- CIT Group Inc.’s potential collapse is forcing manufacturers of consumer goods to search for new sources of lending to help them stay afloat and avoid leaving retailers with inventory shortages.

Manufacturers and suppliers may seek other lenders, cut the number of orders they accept or put up a portion of the money to fulfill orders themselves, according to executives and credit consultants.

CIT is in talks with potential lenders after failing to receive federal guarantees for its bonds. The 101-year-old commercial finance company is running short of cash, and may need as much as $6 billion to avoid filing for bankruptcy protection, according to CreditSights Inc. CIT spokesman Curt Ritter didn’t immediately respond to a call seeking comment.

If manufacturers failed to find an alternative source of credit, retailers would be forced to pay up front for goods, which would be difficult for many of them in this economic environment, said Craig Shearman, a spokesman for the Washington-based National Retail Federation.

“They’d be very conservative, not taking risks, not speculating, so we’d see thinner shelves,” Shearman said in a telephone interview. Consumers may see less variety and stores lacking full stocks this winter-holiday season, Shearman said.

Suppliers and manufacturers sell their payments owed for goods and services to financial services companies such as CIT to receive immediate funds. This short-term financing, known as factoring, gives vendors money to produce the goods that retailers have ordered. Retailers will typically make payments within 90 days, and the factor keeps a fee based on a percentage of the total order.

CIT’s Role

CIT provides short-term financing to about 300,000 customers, according to the company’s Web site. Without a strong balance sheet, many retailers could face liquidity problems if they were forced to pay vendors up front for orders, according to John Kyees, chief financial officer of Philadelphia-based Urban Outfitters Inc., the clothing and housewares retailer.

“If you don’t have a strong balance sheet, then this idea of paying 60 days earlier than you were planning to could put you in a real cash crunch,” Kyees said yesterday in a telephone interview. “They could be in some jeopardy unless they can find somebody to help factor their suppliers.”

About 7 percent of Urban Outfitters’ vendor base is exposed to CIT, according to Kyees. The retailer is working on back-up plans to ensure holiday inventory deliveries aren’t disrupted. It has been in talks with San Francisco-based Wells Fargo & Co. about taking over its factoring and also has the cash to pay vendors directly if needed, Kyees said.

‘An Opportunity’

“We look at it as an opportunity because the money that we have invested today is in very secure paper that’s really getting not much of a return,” Kyees said. “If we took some of that and used it to factor some invoices, we could probably pick up some income.”

CIT comprises about 70 percent of all U.S. factoring and does about $40 billion in factoring annually, according to Ray Ecke, president of Credit Management Resource in Oakland, New Jersey. The next largest firm does about $5 billion a year, Ecke said.

“The question is: Where do all of these people go?” Ecke said yesterday in a telephone interview. “If they go to the remaining factors, they can’t take them.”

The remaining factors, including Wells Fargo, Rosenthal & Rosenthal and Milberg Factors Inc., will most likely take the business of the stronger suppliers and manufacturers and leave the rest without any funding, Ecke said.

Seeking Customers

“If you’re a Wells Fargo or one of the other major factors and CIT goes under, then you’re probably going to move in to try to pick up some of their business,” Kyees said. “And the likelihood is that you’re going to take their strongest customers.”

Retailers have known about CIT’s looming problems and may have been making the necessary contingency plans if they need to replace their financing, according to Al Ferrara, head of the retail practice at accounting and consulting firm BDO Seidman LLP in New York.

“I would expect that any of these companies that have facilities with CIT have explored other possible lending sources in the event that they did file,” Ferrara said in a July 16 telephone interview.

The question that remains is what the potential impact could be on the winter holiday season.

“If CIT were to fail, a chain reaction would be set off that could very well leave retailers with a shortage of merchandise during the crucial holiday season this fall,” Tracy Mullin, president of the National Retail Federation, said in a July 15 statement. “That cannot be allowed to happen at a time when retailers are already struggling to survive the national recession.”

To contact the reporters on this story: Allison Abell Schwartz in New York at aabell@bloomberg.net; Lauren Coleman-Lochner in New York at llochner@bloomberg.net.

Last Updated: July 17, 2009 12:50 EDT