US businesses at risk as lender CIT Group files for bankruptcy

• Restructure enables CIT to cut debt and continue trading
• US taxpayers stand to lose last year's $2.3bn state bailout

The CIT Group headquarters in New York. Photograph: Bebeto Matthews/AP

Thousands of small and medium-sized businesses in the US face financial difficulties and could go out of business after lender CIT Group filed for bankruptcy protection last night.

Although the company will keep operating, it is unlikely to be able to make the same number of loans as before. CIT provides working capital to small firms such as shops, their suppliers and restaurants, many of whom are already struggling in the recession.

In one of the the biggest corporate failures in US history, CIT made its filing in the New York bankruptcy court yesterday, after a debt-exchange offer to bondholders failed. CIT said most of its bondholders have agreed a prepackaged reorganisation plan which will reduce total debt by $10bn (£6.1bn) while allowing the company to continue to do business.

The collapse is also bad news for US taxpayers, who stand to lose the $2.3bn provided last year to prop up the troubled lender.

Creditors will end up owning the company, while common and preferred shareholders – including the US government – will be wiped out by the plan. This is the government's biggest loss yet through its Troubled Asset Relief Programme (Tarp).

"The decision to proceed with our plan of reorganisation will allow CIT to continue to provide funding to our small business and middle-market customers, two sectors that remain vitally important to the US economy," said CIT's chairman and chief executive, Jeffrey Peek, who will step down by the end of the year.

But retail trade groups are worried that many shops will be left without financing – and stock – ahead of the crucial Christmas season, with traditional banks also cutting back credit.

CIT has provided funding to 2,000 firms that supply merchandise to more than 300,000 stores. About 60% of America's clothing industry depends on CIT for financing.

Harold Reichwald of law firm Manatt, Phelps & Phillips said CIT's case is likely to force the company's customers to look elsewhere for financing.

"If I was a small businessman, I would say to myself, 'I have to find alternatives'," he said. "In this marketplace, there aren't a lot of alternatives."