Financing carts in a tense economy

Inflation continues to rise and so do interest rates, meaning financing for new equipment in the waste and recycling industry can be tricky.

“There’s a host of things that go into the operating costs of a waste or recycling business for many municipalities,” says Kemery Kidd, national sales manager for Los Angeles-based Rehrig Pacific Co.’s environmental team. “If they do not have a franchise agreement or they have a contract with a hauler or they collect their own trash and recycling, it’s probably the largest piece of their budget.”

Financial firestorm

David Sable, program manager for Rehrig Financial Services, says the economy might be overheated, and it’s fair to expect that interest rates will have to rise to cool it down. That’s why Sable and Kidd agree the best time to start financing new equipment is now.

Sable says interest rate hikes by the Federal Reserve have a direct impact on borrowing. As interest rates continue to rise, which he expects will continue through the fall, businesses and municipalities are increasing spending now to lock in lower rates to save in the long run and avoid purchasing equipment at a higher interest rate in the future.

The trend could accelerate this year. In early March of this year, Federal Reserve Chairman Jerome Powell told the U.S. Committee on Banking, Housing and Urban Affairs that the Fed might need to speed up interest rate hikes to tame high inflation. Powell said the Fed believes continual increases could be necessary to attain a policy that is sufficiently restrictive to return inflation to 2 percent over time. 

Despite the financial collapse of the Silicon Valley Bank and the increased pressure other banks are facing, the Federal Reserve recently increased interest rates by 0.25 percent. 

Sable says waiting for rates to decrease is shortsighted and misguided. Operators should buy now, he says, and refinance when rates eventually fall.

“The option to pay cash is always going to exist,” he says. “But in a rising-rate environment that may be headed toward a recession, you want to preserve capital. So, if you know capital expenditure is off the table and you’re considering financing, there’s no time better than right now to [secure it].”

Another factor pressuring companies to seek financing options is the long-lasting impact of COVID-19 and the ongoing labor crisis. Kidd says Rehrig Pacific’s market research shows haulers are putting pressure on municipalities to pay for carts as part of their hauling agreements.

“They want a safer working environment, they want efficiency and they also want to organically control the amount of waste they collect,” he says. “So, a lot of haulers are walking away from five- or 10-year contracts if carts are not included in the contract.”

Kidd says some municipalities did not include the cost of carts in their budgets, which could have caused them to miss out on securing a waste hauler, especially in 2021.

Sable says Rehrig Pacific has seen an uptick in municipalities seeking financing for carts, especially in areas with more than 10,000 residents.

Financing for the future

Sable and Kidd say financing options differ based on the hauler's or municipality’s size and creditworthiness. Rehrig Pacific tailors a financing option to fit into its customers' budgets so their cash flows see a minimum impact, Kidd says.

“I think if we learned anything in 2020, we know that cash is the first thing you’re going to need if something goes wrong,” he says. “We use financing as a tool to make sure they can get what they need to keep their employees working safely in a quicker time frame.”

Typically, this means offering an option to spread out the payments for new carts as much as possible to offer lower rates.

Derrick Masimer, vice president of sales for Toter, a Charlotte, North Carolina-based residential cart manufacturer and a subsidiary of Wastequip, says the company uses Wastequip Finance, which offers up to 10-year financing for municipalities and up to seven-year financing for waste companies based on credit quality.

“We have application capability up to $750,000 in total exposure; however, we may need additional information should the customer’s credit warrant it to pursue an approval,” Masimer says. “This financing can be used on things such as equipment or assembly and distribution.”

Sable and Masimer say cart acquisition is a common hurdle municipalities or smaller buyers must consider, especially now. With the rapid increase in interest rates, Masimer says borrowing costs have increased, and these increases have been passed on to Toter customers’ residents.

“These additional ownership costs have to be passed down to the end user to keep our customers’ businesses profitable and customer service at a high level,” Masimer says. “To fund the acquisition of new carts and containers, the money needs to come from somewhere.”

He adds that it’s common for municipalities to include these costs in monthly utility bills. However, they can obtain grants to offset those costs or pursue other financing methods to minimize costs for the resident.

Some ways organizations can secure funding to finance carts include grants provided by the U.S. Environmental Protection Agency or funding from organizations such as New York City-based Closed Loop Partners and its Closed Loop Infrastructure Fund, which helps to fund replicable, scalable and sustainable recycling and circular economy infrastructure projects across collection, sortation, processing and new technologies.

The Recycling Partnership, Washington, also offers grants that provide funding to convert bin- or bag-based curbside recycling programs to carts or to implement new cart-based curbside recycling programs.

However, some grants have conditions. For example, to qualify for grant funding from The Recycling Partnership, a community must be seeking to purchase carts that are more than 60 gallons in volume and must collect curbside recyclables on a weekly or every-other-week basis.

According to a Waste Today article written by John Ruth, the founder and managing partner of CTBH Partners LLC in Hanover, New Hampshire, businesses also can consider financing qualifying projects by using tax-exempt private activity bonds (PABs) as an alternative to traditional corporate debt. PABs offer potentially significant interest rate savings in light of the tax-exempt status of bonds, potentially longer-term debt than otherwise available, access to an additional pool of investor capital and flexible financing structures. These bonds can be used to fund a variety of solid waste capital expenditures, including carts, trucks, transfer stations, material recovery facilities and landfills.

However, to receive PAB benefits, the issuer needs to comply with various federal and state regulatory requirements that could result in smaller bond issuances and a more involved bond issuance process (with pre- and postissuance compliance requirements) than traditional corporate debt.

Cart considerations

Masimer says it’s important to consider the cost of ownership and longevity of the cart, including its warranty. If a cart has a short lifespan, acquisition prices will rise because of replacements.

Depending on the time of purchase, raw material costs also can fluctuate and alter the price. Other varying factors include manufacturer lead times and cost of deploying carts in seasons with harsh weather when it can be challenging to find additional labor to help distribute them.

Municipalities also need to consider tonnage and the quality of material being collected. It might not make sense for a community to invest heavily in carts if only a small percentage of residents use the service.

Labor also factors into the decision. Depending on the size and bandwidth of the workforce, a hauler or municipality might not want to invest in carts.

“When people are considering carts, I think they need to recognize there is a whole lot more that goes into that solution,” Sable says. “It’s not just the equipment that they're talking about. In order to make a wise decision, you need to be thinking about all of those things: insurance, efficiency, material value, total cost of ownership and return on investment.”

While there is plenty to consider when exploring financing options, Kidd says most companies that offer financing for cart acquisition are willing to help an organization figure it out.

“It doesn’t cost anything to talk to us,” he says. “It only costs a little bit of your time.”