July 23 (Bloomberg) -- Rosenthal & Rosenthal, the largest privately held U.S. factoring company, and Sterling Bancorp may pick up clients after CIT Group Inc.’s brush with bankruptcy left some manufacturers without financing.

CIT’s $42 billion of factoring business last year could be up for grabs after the lender almost ran out of money last week. With the fate of New York-based CIT still in doubt, small firms are calling Sterling, the bank said in an e-mailed statement, and Rosenthal has added clients as sources of capital dried up.

“We’ve seen an increase in inquiries from companies that never factored before,” said Peter Rosenthal, 38, president of the 71-year-old company, who declined to comment directly on CIT. “We go through cycles where banks tighten and this is a particularly extreme downturn.”

In factoring, manufacturers turn their accounts receivable over to firms such as Rosenthal and Sterling, both based in New York, and typically receive about 80 percent of the value in cash. The factoring firm then collects the full amount from the retailer, keeping a percentage of the proceeds as compensation for its efforts.

The process helps manufacturers with cash flow and cuts the risk of being stiffed by business failures, which rose 38 percent in the first quarter, data compiled by Oklahoma City- based Jupiter eSources LLC show.

At stake is CIT’s customer base of almost 1 million borrowers, including about 300,000 firms that get access to cash by selling their billings to factoring firms.

CIT Fallout

Those clients may turn to competitors who already finance $2 billion to $10 billion annually, including GMAC Inc., Wells Fargo & Co., BB&T Corp., and Milberg Factors, a private company based in New York, according to John Kiefer, an industry veteran of more than 25 years who heads First Capital, a closely held lender in Boca Raton, Florida.

Some customers have already gone bankrupt. Moore-Handley Inc., an Alabama hardware distributor, becoming the first to blame CIT’s inability to supply cash on July 17, when it filed for court protection.

Rosenthal, whose Web site says the firm finances more than $4 billion, may be among the biggest beneficiaries of CIT’s struggle, Kiefer said.

“If they can get $1 billion from clients leaving CIT, that’s pretty phenomenal growth,” said Kiefer, CEO of First Capital, based in Boca Raton, Florida. “Rosenthal is family owned, so they don’t need rapid growth, they just need decent returns.”

Sterling Bancorp

CIT’s factoring declined 21 percent in the first quarter to $8.35 billion compared with the same period last year, according to a regulatory filing.

Sterling Bancorp expects revenue growth of 10 percent to 15 percent over the next year, partly from adding CIT clients, said Howard Applebaum, Sterling’s chief lending officer.

“When times are tough, factors and asset-based lenders do better,” Applebaum said.

Sterling has offered factoring since its founding in 1929, mainly to apparel and textile companies with less than $200 million in annual sales, he said. The company has annual factoring volume of almost $1 billion after the April acquisition of DCD Capital LLC, a New York-based factoring firm focused on Asian markets, he said.

Profit fell 9.7 percent in the first quarter at Sterling, whose stock has dropped almost 50 percent this year.

Client Size

“We’re quite proud that we’ve resisted CIT,” said Paul Aberasturi, chief financial officer of Diane von Furstenberg, a New York-based apparel maker founded by the fashion designer that has factored with Rosenthal since 2005. “Rosenthal is very well-capitalized, there’s a lot of transparency and they seem to have come out of this in very good shape.”

CIT typically takes much larger clients and is known for assuming more risk than smaller factors such as Rosenthal, said Aberasturi, who said he used CIT at previous employers. Spokesmen for CIT, GMAC, and Milberg didn’t respond to requests for comment. Wells Fargo’s Gabriel Boehmer had no immediate comment. CIT said July 20 it lined up $3 billion in capital to ensure customers have access to credit.

Rosenthal declined to detail finances of the family firm, which employs 200 people. The company’s conservative operating style left it mostly unaffected by disruption in the credit markets, Rosenthal said.

“As a private company they are not bound by a lot of the rules and regulations like we are as a bank,” said Darren Linder, BB&T Corp.’s managing director of factoring services.

More factoring customers are leaving CIT and GMAC because of concern that they may have to cut off credit, Linder said. GMAC was bailed out by the U.S. after losses tied to loans on autos and subprime mortgages.

Terms of Factoring

Factors typically release 80 percent to 85 percent of the value of an invoice to its client, then charge 3 or 4 percentage points above the prime interest rate until the invoice is paid, said Stewart Chesters, CEO for North America in Chicago at Bibby Financial Services, a U.K.-based company. A 1 percent fee for collections and credit services is customary, he said.

Lending against receivables curently provides cash more reliably than bank loans that rely on inventory or equipment, Chesters said. That’s because the recession cut resale prices for assets such as machinery, leaving less value to secure loans, he said.

Family Business

Imre “Jimmy” Rosenthal started his factoring company in 1938 after earning an accounting degree from New York University. His father, Andor Rosenthal, was a Hungarian immigrant who owned a children’s manufacturing company and provided $100,000 in initial capital for his son’s business.

Peter Rosenthal’s father, Stephen, took over as president after Imre Rosenthal’s death in 1996, when annual financing topped $2 billion a year and the firm employed about 250 people, according to a 1997 story in Secured Lender.

While factoring for apparel companies remains its main business, Rosenthal also finances asset-based, real estate and fine art transactions. Stephen Rosenthal is now chairman and chief executive officer.

Rosenthal’s target clients are “any company doing a couple million dollars up to a couple hundred million selling into JC Penney, Kohl’s, Target or others,” Peter Rosenthal said. “We try to sell that we’re privately held and we can offer a level of service that we hope is superior.”

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

Last Updated: July 23, 2009 08:49 EDT