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By Alan J.   Liddle

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NEW YORK (Nov. 2, 2009) Restaurant operators, already scrambling to fund growth, may need to reach deeper into their bag of tricks as CIT Group Inc., a large industry lender, has filed for Chapter 11 bankruptcy protection from creditors.

While the New York-based CIT Group said that a prepackaged plan for reorganization, approved by 90 percent of its creditors, will help it continue to provide funding to its small and middle market clients, many restaurateurs have said for months that CIT is unavailable, especially for small business lending to franchisees.

Prior to its woes beginning this year, CIT Group was the largest Small Business Administration loan provider, based on gross dollars, having doled out 1,195 loans to small businesses totaling $766.6 million.

The lender expects to emerge from bankruptcy by the end of this year.

“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,” CIT Group chairman and chief executive Jeffrey M. Peek said in a statement.

CIT officials said the company would reduce debt by $10 billion, improve liquidity and capital ratios, and stressed that none of its operating subsidiaries were included in the filing. The firm maintained that those operating divisions “are expected to continue normal operations during the pendency of the cases.”

Still, the lenders claim that its bankruptcy will have little effect on operations and that it intends to keep money flowing may be of small, if any, comfort to restaurant companies. Some, including Tampa, Fla.-based The Melting Pot, said earlier this year that CIT had already begun limiting loans to restaurant operators.

By Alan J.   Liddle

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Laments about a lending freeze to restaurant companies have been fairly common among franchisors and franchisees since last year and reached beyond CIT to reference other lenders, including GE Capital and Bank of America. Through this year, many restaurateurs have contended that no credit thaw was in sight.

Many lenders claim they are still negotiating loans, and smaller deals have been reported, but the hurdles to secure financing are lofty, including requirements for more equity, collateral and higher rates.

To spark system growth in the face of tight lending, some franchisors have stepped in to help franchisees by reducing royalty rates or offering micro-loans for new unit expansion. Chains such as Quiznos, Marco’s Pizza and Domino’s Pizza have agreed to help franchisees purchase new locations, finish building projects or remodel existing locations.

Others, like Roark Capital Group, which is the parent to Focus Brands chains including Moe’s Southwest Grill and Schlotsky’s, and Edmonds Capital LLC, which is parent to Petrus Brands-operated chains Shane’s Rib Shack and Planet Smoothie, have agreed to help potential and current franchisees through new investment models and the sharing of best practices at franchisee conferences.

While capital is hard to come by, lenders are fighting their own funding battles from prior failed investments. When Kainos Partners Holding Co., a 56-unit Dunkin’ Donuts franchisee filed for Chapter 11 bankruptcy protection in July, the Greer. S.C.-based operator’s court filings listed a $24.9 million debt to CIT Group.

CIT’s financial health has been a concern to many in the business community for months, including the International Franchise Association, which, in July, urged the federal government to help keep CIT Group solvent. In petitioning Congress to help CIT, the IFA said, “Providing critical assistance to a substantial SBA lender such as CIT … seems a prudent use of government assistance during this challenging time.”

However the federal government had heard such contentions before and now finds itself to be one of bankrupt CIT’s largest creditors, as it pumped $2.33 billion into that company last December as part of the Troubled Asset Relief Program, or TARP.

CIT Group, the 101-year-old commercial lender, in its filing with the U.S. Bankruptcy Court for the Southern District of New York, listed $71 billion in assets and $64.9 billion in debts.

Contact Al Liddle at aliddle@nrn.com.