For CIT Group Inc. (CIT), a critical challenge looms even after it runs the gauntlet of restructuring in or out of bankruptcy court: How will CIT get new money to lend out?

While restructuring efforts will buy the struggling lender more time by cutting its debt load or postponing debt maturities, CIT's ability to raise funds cheaply - a crucial requirement for any lender - is severely limited by a banking regulator. Unless these limits are lifted, the junk-rated company can do little to grow its lending business; and it would likely spend the time eked out from a restructuring winding down its loan book, and shrinking to a shell of its former self.

A spokeswoman for CIT declined to comment for this article.

CIT, a century-old company that is one of the largest lenders to thousands of small and medium-size businesses, traditionally has relied heavily on the capital markets - bonds and short-term debt called commercial paper - for its funding. In turn, it loaned out these funds at higher interest rates and pocketed the difference as income.

But the credit freeze shut out CIT and other lenders from these markets, eliminating this key source of money, known as wholesale funding.

To cope with the loss of wholesale funding, lenders ranging from American Express Co. (AXP), to GMAC Inc. to Discover Financial Services Inc. (DFS) turned their attention to growing deposits as a means of funding.

CIT owns a Utah bank, which it hoped to use to help fund its business. But the Federal Deposit Insurance Corp. in July issued a cease-and-desist order, capping the amount of "brokered deposits" that CIT Bank can accept. Brokered deposits can grow quickly as a source of funding, but regulators worry that such deposits can just as quickly be withdrawn, leaving banks in a precarious position.

"A business model, like CIT's, which is completely reliant on wholesale funding probably won't adequately provide for the company's needs going forward," says Mark Wasden, an analyst at Moody's Investors Service. "Ultimately, with the redone capital structure, CIT would probably need more deposits to continue lending at sufficient volumes to rebuild its loan portfolios."

CIT Bank had been using brokered deposits, which are similar to certificates of deposit and sold by brokers, to raise more funds. The holding company had hoped to transfer more of its assets to the bank, but regulators were concerned about the risk involved.

Ultimately, the fate of CIT could depend on its ability to persuade the FDIC to allow it to raise deposits to fund assets it moves into its bank. Its ability to raise deposits is vital to its survival because the lender can't revert to its traditionally heavy reliance on bonds and short-term debt for funding.

An FDIC spokeswoman, LaJuan Williams-Dickerson, declined to comment on the cease-and-desist order for CIT Bank but said the regulator is working with the company. In such cases, the FDIC will review its cease-and-desist order after a stated period of time and decide whether to extend or lift the restriction, she said.

For the second quarter, CIT borrowed funds at a higher rate than it loaned, an obviously unsustainable practice for a lender. CIT's net interest revenue - or the difference between what it earned from the loans it extended and its borrowing costs - totaled a negative $19.1 million, compared with a positive $169.8 million a year earlier.

"CIT's funding model doesn't work with its current capital structure," says Jason Mudrick of Mudrick Capital, which specializes in high-yield and distressed investments. "It has to get to a point where it has a business model that is viable."

CIT shares were trading recently at $1.33, down 87 cents, or 39%. The shares have lost about 70% of their value this year.

-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729; aparajita.saha-bubna@dowjones.com

-By Kate Haywood, Dow Jones Newswires; 212-416-2218; kate.haywood@dowjones.com