SBA loans for recyclable material wholesalers: lending to a yard that lives on the spread

A buyer, a processor and a seller of commodities

NAICS 423930 covers businesses that buy scrap metal, paper, cardboard, plastics and other recyclables, sort and process them, and sell them on to mills, smelters, paper plants, brokers and exporters. The typical yard buys from contractors, demolition firms, manufacturers, auto dismantlers and the public, and sells by the truckload or container.

Its gross profit is the spread between what it pays for material and what it sells it for, less the cost of handling. Both sides of that spread move with commodity markets, and they do not always move together. When prices fall quickly, a yard holding inventory bought at yesterday's price loses money on it; when prices rise, the same inventory produces a gain that has nothing to do with how well the yard is run. A lender's first job is to separate those two.

What the SBA figures show

Three things stand out. Loans are large: a median of $250,000 and a quarter at $1 million or more, because yards need land, scales, balers, shears, loaders and trucks. The 504 program is heavily used, 35 loans at a median of $1,343,000, which fits a business whose main assets are real estate and long-life equipment. And the borrowers are established: start-ups were only 5.3% of loans. A new yard needs permits, a site zoned for the use and a set of buyers for its output before it has any revenue, and few lenders will take that on.

Acquisitions were only 4% of loans, against 10.4% nationally, though the 6 that closed were large, at a median of $1,442,100. The data does not say why, but some yards that change hands are worth more than a 7(a) loan of up to $5 million can finance, and some are bought by larger recyclers that finance purchases outside SBA. For purchases beyond SBA's reach see acquisitions above the SBA limit.

How lenders read earnings through the commodity cycle

A lender underwriting a scrap dealer does not simply take last year's profit. It wants to see the business in a falling market as well as a rising one, and it wants the volumes behind the dollars. SBA's minimum debt service coverage is 1.15x, and 1.0x globally including the owners; a lender applies that to earnings it believes are repeatable, which for a commodity business usually means an average across several years rather than the best one.

Industrial accounts, where the yard places containers at a manufacturer and hauls its scrap on a schedule, are the most valuable revenue a yard has. They are recurring, the volume does not depend on the public, and they often come with the containers and roll-off trucks that make up the yard's equipment. A lender will ask how many there are, how long they have run and whether they are under contract.

Show tons, not just dollars. A lender cannot tell a good yard from a good year without them.

The yard: land, equipment and what is in the soil

Most of a recycler's collateral is real estate and heavy equipment, and both are financed for the long term. SBA 504 covers owner-occupied real estate and long-life equipment, typically 50% from a bank, 40% from the CDC and 10% from the borrower, and the CDC's share can reach $5 million. Within a 7(a), real estate runs up to 25 years and equipment up to 10, or 15 if its useful life supports it. A baler, shear or truck scale with a long life can justify the longer term. See SBA 7(a) vs 504 and equipment financing vs SBA 7(a).

The environmental question is the one that can end a deal. Scrap yards handle vehicles, batteries, oils, coolants and metals, and decades of that can leave contamination in the soil and groundwater. When real estate is collateral, lenders complete SBA's environmental review before closing, which on a site like this usually means environmental reports beyond a desktop screen. Contamination does not always kill a loan, but it has to be understood, bounded and, where required, addressed before the lender will take the property.

• Permits. Stormwater discharge permits, air permits for shredders or torch cutting, and any state recycling or solid waste permits. A lender wants them current and in the operating company's name.
• Zoning. Some yards operate as a legal non-conforming use. If the yard could not be rebuilt as a scrap yard after a fire, the real estate is worth less to a lender.
• Equipment appraisal. Shears, balers and shredders have a real resale market, and an appraisal at orderly liquidation value supports the loan. See equipment appraisal: OLV and FMV.

Cash, compliance and the receivables

Yards that buy from the public pay out cash or its equivalent across the scale every day. Most states regulate scrap metal purchases to fight theft: seller identification, photographs, records of each transaction and, for some items such as catalytic converters, extra restrictions. A lender reads those records for two reasons. A yard out of compliance can lose its license. And cash purchases that are not fully recorded make reported margins unreliable, which undermines the earnings the loan is built on.

On the selling side, the yard's receivables are owed by mills, brokers and exporters. They can support a line of credit: asset-based lenders typically advance 80% to 90% of eligible receivables, receivables more than 90 days past invoice are typically ineligible, and borrowing bases commonly cap any single customer at 20% to 25% of eligible receivables. That last limit bites in this industry, where a yard may sell most of a commodity to one mill. Export receivables are often excluded or limited unless insured or backed by a letter of credit. See foreign receivables in a borrowing base, lines of credit for wholesale distributors and machinery and equipment in an ABL.

Preparing a recycler's file

Start with the SBA checklist: business tax returns for 2–3 years, a P&L and balance sheet with a year-to-date P&L through last month-end, a debt schedule with copies of any notes being refinanced, and personal tax returns and a personal financial statement for each owner of 20% or more, each of whom personally guarantees the loan. For a yard, add:

• Tonnage and margin by commodity for three years, and the inventory method
• Sales by customer, and an AR aging with days outstanding
• An equipment list with ages, hours and any liens
• The site: deed or lease, permits, and any prior environmental reports
• A description of purchase controls and theft-law compliance
• For a purchase, the target's latest full year of figures and the letter of intent

For a purchase, SBA requires at least 10% of total project costs as equity, an independent business valuation where the amount financed, less appraised real estate and equipment, exceeds $250,000, and no earnout to the seller. From 1 October 2026 a change of ownership must show 1.25x on historical results, and a purchase of $3 million or more excluding real estate needs a quality of earnings report. See how SBA 7(a) finances an acquisition. Once the documents are in, Transparent builds the full lender package — financing model, lender presentation, blind teaser and underwriting memo — in a day and takes it to the 278 lenders in its book that write SBA 7(a) and 504, or to the 235 that write asset-based lending and lines where a borrowing base fits better. On SBA loans the lender pays Transparent, not the borrower.