Taking it to the bank

Small-business owners, particularly in the cyclical recycling sector, often demonstrate a preference for paying cash for equipment, vehicles and even large-scale capital expenditure (capex) projects.

Presenters at an ISRI2021 session titled “Financing to maximize growth” examined some of the pros and cons of accessing credit for capex needs and delved into the various types of financing firms operating in the capex lending arena can provide. ISRI2021 was an April online event organized by the Washington-based Institute of Scrap Recycling Industries.

For waste and recycling companies, there is no “one size fits all” approach to borrowing money, the presenters seemed to agree. Rather, a variety of factors can influence when it is best to approach a commercial bank, seek a specialty leasing or financing arrangement, or dip into cash reserves.

One tree, different branches

The session was hosted by Pittsburgh-based Vision Financial Group Inc., whose Director of Sales Kevin Canepa offered an overview of four different types of lenders or financing advisory firms who can offer different terms and services to waste and recycling companies seeking to finance new trucks or equipment.

Canepa said Vision Financial arranged some $40 million in financing for waste and recycling company owners in 2020. That figure gives the firm a growing presence in the sector, but Canepa also noted that in the United States corporate sector in 2019, “An estimated $900 billion of equipment was financed through loans, leases and lines of credit.”

National, regional and local commercial banks remain sources of financing. While a bank may be able to offer a competitive interest rate, Canepa said they also tend to require covenants that can establish “certain criteria” tied to a company’s balance sheet and financials.

“Banks are going to get a little closer into your business regarding what you’re doing and how you’re doing it to make sure that their assets are covered,” said Canepa. This can be hard to contend with for any independent-minded business owner, but can be especially problematic in the cyclical recycling sector, where quarterly revenue can plunge based on falling commodity prices and declining scale traffic.

Non-bank options include the captive financing arms of some of the largest equipment companies, such as truck, excavator and loader manufacturers. These companies can offer “very attractive rates,” said Canepa, although he implied a buyer must be tuned in as to whether some of the “saved” financing costs are worked into the upfront cost of the equipment.

Waste company owners also can seek out an independent broker to “shop” for them for the best financing terms. Such brokers may ultimately go to a bank, an independent leasing company or a captive financing arm to find the best rate. “Typically, they can get you a good deal,” said Canepa.

Independent leasing companies, such as Vision Financial, also serve waste and recycling firms. Canepa described Vision as a “niche market player,” but he said other independent leasing firms can be larger “generalists.” Such leasing firms can arrange financing in amounts from $10,000 to $1 million, said Canepa.

Understanding ups and downs

After 10 years in the scrap business, Brandon Roznovsky, CFO of Brenham, Texas-based Brannon Industrial Group, understands that sector’s preference to both save cash and to spend it on equipment purchases to avoid debt obligations.

However, Roznovsky said the low-interest rate environment combined with tax incentives available in 2021 “make it a pretty good time to borrow.” (For more on the tax incentives, see the sidebar “A section worth browsing.”)

Brannon, which operates a scrap yard under the Premier Metal Buyers brand, has worked with a commercial bank in its region but also has experienced benefits from independent leasing arrangements.

In the commercial banking sector, “We’ve encountered some lending folks who really like our story and find the opportunity exciting, [but] then they get a little uneasy when they see our P&L [profit and loss statement] occasionally looks like an EKG monitor,” said Roznovsky.

Adding that “metal recycling has its own nuances that make it tick,” he continued, “If the lender understands them, it makes life a lot easier; things go faster and smoother. A lender who does not understand the ebbs and flows of the metal market adds a lot of risk to an organization. It’s imperative you have [access to] someone who understands you and your business.”

A third-party or independent leasing firm’s ability to move quickly also was identified by Roznovsky as a critical benefit. “Competitive terms are important, however, speed and ease of business with a lender—and their consistency—necessarily outweigh shopping for the lowest interest rate on every deal,” he stated.

Calculating that 25 basis points is “only about $10 per month” on a $100,000 loan over five years, Roznovsky said, “Depending on the opportunity and circumstances, a small premium may be well worth getting the deal done faster” in the fast-paced and volatile scrap business.

Market fluctuations and business opportunities and challenges that come and go quickly “really force us to be dynamic,” said Roznovsky of Premier Metal Buyers’ situation. A lender that can provide timely service “is certainly an asset to the business,” he commented.

As waste firms increasingly collect, process and ship secondary commodities with changing values, they too may need to find financing partners who understand the up-and-down nature of a recycling sector balance sheet.

Projecting a lifespan

In addition to interest rates, bank covenant considerations and other costs of borrowing, waste and recycling company owners also make financing decisions based on the specific equipment being leased or purchased.

When engaging in a limited term project, said Roznovsky, the equipment rental option remains viable. “Rentals are practical for projects or for when equipment is down,” he commented.

Canepa cited forklift trucks as an example of equipment that even deep-pocketed corporations would prefer to lease rather than buy. “Large companies do not like to use their money to buy forklifts, for instance, that they know they’re going to get rid of in five years,” he remarked. “And, they don’t want to have the hassle of reselling that equipment on the used equipment market. A leasing company can take care of that for them.”

There also is an opportunity cost aspect to conserving cash rather than paying upfront for a plant and equipment. “Finance experts generally recommend that you have a cash reserve of three to six months,” said Canepa. The wisdom of having this reserve can be seen in light of the circumstances of restaurant owners and others affected by COVID-19-related restrictions.

“Competitive terms are important, however, speed and ease of business with a lender—and their consistency—necessarily outweigh shopping for the lowest interest rate on every deal.” –Brandon Roznovsky, CFO of Brannon Industrial Group

Having that cash on hand “demonstrates financial stability, allows you to meet bank covenants for liquidity ratios and financial statements, and it allows you to look at opportunity costs,” said Canepa.

As an example, he continued, “If I were to pay $300,000 for [a] car crusher today, what’s the opportunity cost for not having that cash, versus leasing it and paying $10,000 a month [and] getting an immediate cash return on your investment?”

Such cash may be needed if an acquisition opportunity arises, or the chance to buy a parcel of land that has come onto the market adjacent to one’s transfer station or scrap yard opens up.

As an example of when a firm may prefer to spend cash, Roznovsky pointed to “non-titled assets,” such as a hand-held metals analyzer unit. He said Premier Metal Buyers also is “more inclined to [take] the cash route on items with shorter lives.”

At the other end of the spending spectrum, Mike Taranovich of Bradenton, Florida-based Proterra Recycling Systems Inc. said certain financing and leasing options can be critical when undertaking a larger material recovery facility (MRF) project.

Taranovich says he works with firms such as Vision Financial so he can prepare an overall budget for the project that includes financing “so I can offer a complete turnkey quote with financing included.”

Adds Taranovich, “Even my biggest customers like to use a Vision Financial-type company” rather than a regional bank, as it likely entails a faster timetable.

He says lender knowledge on the MRF sector is “a huge plus.” Says Taranovich, “I’ve dealt with [banks] who didn’t have a clue what a cardboard screen was or an optical sorter, and it just really slows down the entire process. By dealing with people who know the market, I don’t have to re-educate [a lender] every time, and that speeds up the process.”

This sentiment also applies to smaller projects, not just multimillion-dollar MRF retrofits, said Taranovich. He pointed to a mattress recycling startup that needed a baler. The firm couldn’t get a lender “to even talk to them” because they had no track record, said Taranovich. However, Vision Financial was able to provide financing “even quicker than expected” and the firm has grown “and is looking for other components to add.”

Despite purchasing options, owners in the waste and recycling sector are unlikely to lose their aversion to debt, a condition addressed by Roznovsky. “Inherently, no one really likes debt,” he remarked. “It’s easier to sleep at night without that cloud hanging over you.”

Ignoring the menu of financing options available in the U.S., however, may simply be bad business, he added. “We feel there is an art to maintaining a healthy debt level and maintaining cash reserves for opportunities and uncertainties that you may encounter.”

The author is a senior editor with the Recycling Today Media Group and can be contacted at btaylor@gie.net.