Like many small business owners, Harry Kazazian, chief executive of sleeping bag manufacturer Exxel Outdoors Inc., has been wrestling with a dilemma for months.

The question: whether to leap off the deck of the sinking ship known as CIT Group Inc., one of the nation’s largest financers of small businesses like his.

As long as Kazazian can remember, his Irwindale company, which supplies the likes of Wal-Mart and Target stores with low-cost products, has been a customer of New York-based CIT. Exxel uses the firm for factoring, an invoice-collection service used heavily in the retail industry.

But as reports of financial troubles at CIT began leaking out some months ago and Exxel experienced a “hiccup” in service, Kazazian said that he grew nervous. He increased the amount of cash reserves and obtained preapproval for factoring contracts with several of CIT’s competitors.

“I’ve got alternative financing and factoring in place,” he said, “so I’ve got a backup plan if things fall apart.”

Last week, CIT filed for Chapter 11 protection in New York bankruptcy court, one of the largest corporate bankruptcies in U.S. history. None of its operating segments, including the one that handles factoring, is included in the bankruptcy, and executives have said payments and services will be uninterrupted.

Still, Exxel and hundreds of small and medium-size companies in Los Angeles – many of them in the retail industry – are facing an uncertain future. And more than a few are looking at abandoning CIT.

Ilse Metchek, president of the California Fashion Association, a non-profit organization for the apparel industry, estimates that as many as 1,000 apparel manufacturers in Southern California – about one-third of the total – rely on CIT for factoring, a process that allows companies to collect on accounts receivable quickly and efficiently, keeping cash flowing in an uneven business.

So far, most clothing manufacturers are on hold, Metchek said, because they would rather not leave the largest – and cheapest – factoring option.

“CIT has been the bulwark of the industry,” she said. “Companies can go elsewhere, but the factoring will cost more.”

Evaluating options

That hasn’t stopped many companies from at least looking.

Lonnie Kane, chief executive of Karen Kane Inc., a women’s apparel manufacturer in Los Angeles that still has an account with CIT, admitted he has checked out the competition.

“We personally didn’t want to change,” he said, but as CIT ran into trouble, “it left a lot of us with a great deal of uncertainty.”

The company did, however, take action. Karen Kane, which typically does about $80 million in business annually through CIT, had a so-called maturity position, meaning the apparel company had extra money sitting in its account with CIT.

But with bankruptcy looming, Karen Kane took its money back.

“If they were to go Chapter 11 with my money, I become a creditor,” Kane said. “Well, the last thing I want to do is become a creditor.”

CIT has tried to reassure customers that there will be no disruption to service.

“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,” said CIT Chief Executive Jeffrey Peek in a statement last week.

The bankruptcy hearing is set for Dec. 8. Executives have said their “prepackaged” plan could be resolved by year’s end with the restructuring of $64.9 billion in debt.

Lawyers representing CIT declined to discuss the case on the record.

But Joe Baldiga, a Westborough, Mass., bankruptcy attorney familiar with CIT’s situation, said the real test will come later.

“If you look at it from CIT’s perspective, they’d like to suggest that everything will be seamless,” said Baldiga, a partner who heads the reorganization unit at Mirick O’Connell LLP. “But I think customers are going to be skittish. Only time will tell if it’s as seamless as they’re saying; CIT’s competitors are not standing still.”

Growing competition

One of those competitors is Millberg Factors Inc., which said it is engaged in “serious discussions and negotiations” with at least 50 of CIT’s customers in Los Angeles County.

“We certainly are marketing our services to potential clients through intermediaries and responding to clients who make inquiries,” said David Reza, the Glendale-based senior vice president of Milberg’s western region.

He would not say whether any new contracts in Los Angeles have been signed.

Stonefield Josephson Inc., an accounting firm that handles about 100 of CIT’s L.A. customers, said only a handful have so far jumped ship.

“All this creates lots of negative energy,” said Ron Friedman, a past president of the firm.

But, he added, “CIT has engendered tremendous loyalty and it’s hard to break that.”

One of those loyal customers is Barbara Lesser, an apparel manufacturer owned by L.A.-based Wearable Integrity Inc.

“It was a little disconcerting at first,” said Mark Lesser, the company’s owner. “They stopped advancing for one day, but realized what chaos it caused and got it worked out and under control.”

But he’s keeping one eye open and a hand on the door.

“They may be the biggest,” Lesser said of CIT, “but they aren’t the only game in town.”