Recycling is a hot topic.
As the circular economy gains traction, consumers and businesses alike are becoming more focused on their environmental impact. They’re going green.
This movement has opened the door for opportunity. To meet the growing demand, waste management companies are pouring time, attention, and resources into opening material recycling facilities (MRFs).
You may be one of them.
The good news: the recycling industry is profitable and growing. If you can get in on this emerging sector, and set your operations up the right way, there’s business to be done.
At the same time, opening an MRF is a major investment. Capital intensive and full of potential pitfalls when pivoting from waste management.
So today, let’s look at five key factors to consider before opening an MRF.
1. Materials
First, consistency is vital.
In order to justify expansion from traditional waste management, there needs to be a steady flow of materials. If you don’t have the input, you can’t produce the output.
Start with inbound tonnage. But don’t stop there. Consistency is also about sustaining high quality commodities in tons per hour (tph), and, ultimately, tons per year (tpy). Make sure you’re looking at not just flow amount, but also high-quality processing.
Here, there are several variables to look at.
Which type of MRF operation?
When it comes to materials, choosing the type of MRF to operate is a critical decision. In short, the two main types of MRFs process consumer recyclables or construction and demolition (C&D) recyclables.
Consumer recyclables are more common and deal in smaller debris (think curbside recycling programs). Whereas C&D debris tends to be bulky, filling landfills quickly. The advantage for C&D MRFs comes into play in geographic areas where land is scarce and alternatives to landfills are in high demand.
One callout for C&D MRFs is that each state sets its own quality standards, and regulations vary widely. If C&Ds are on your radar, do your homework.
Will you use single-stream or dual-stream?
Something’s got to give. If you’re designing a consumer recyclables system, you’ll have to make the choice between a single-stream and dual-stream system. Or, more accurately, between prioritizing the customer participation or operational efficiency.
Single-stream systems are easier on customers but require more upfront sorting and usually process a greater mix of materials. While dual-stream systems are easier on the backend because fibers and containers are processed on different lines from the start, freeing up manual labor and processing capacity.
Ultimately, this decision should align with your business strategy, metrics, and overall business plan.
What’s your material mix?
Not all materials are equal.
Glass, for example, often requires special equipment and more maintenance from damage. It can also cause challenges for single-stream systems and lead to slowdowns. Contaminants, like resins, must also be factored into the output quality.
Lastly, as we’ve seen in recent months, commodity pricing can fluctuate. The pandemic, the war in Ukraine and the 2008 recession all sent ripples through the commodities market, causing headaches for recycling facilities’ cash flows and operations.
Planning is the best way to achieve consistency. And it starts in the ideation phase of an MRF operation build.
2. Equipment and Facilities
With your material mix and flow on paper, it’s time to look at building out your MRF. That means equipment and facilities. Setting up the operations to power your recycling business.
Unlike landfills, MRFs pre-sort, sort (sometimes more than once) and process recyclables according to their commodity type and quality standards. These higher touch recycling systems require more manual labor and specialized equipment. Which can lead to increased costs as compared to traditional landfill operations.
There are two routes you can take when it comes to your operations. One has more manual sorting methods, and the other has more technologically advanced systems. The latter include equipment like specialized screens, eddy current separation, optical sorting equipment, and more. All of which carry higher price tags and should be factored into the investment.
Will you use your existing facility or build a new one? Will you purchase equipment new or used? Will you invest in high-end technology or deploy more manual labor?
All these decisions factor into your costs and planning.
Let’s look at the question of equipment, for example. Used equipment comes at a lower price tag upfront. But it may lead to increased maintenance costs and quality inconsistency in the end recyclable. New equipment needs less servicing downtime and less manual oversight. It comes down to which is a higher priority for you.
Lead times also factor into purchasing new equipment. It’s important to remember these can vary. Over the last two years, we’ve seen lead times increase with demand and labor shortages.
As you can see, equipment and facilities choices are filled with variables. And, ultimately, these decisions could make or break your success.
3. Contracts
Contracts play a critical role in the success, or failure, of MRFs.
If you’re collecting or accepting C&D materials, for example, there has to be a market for them. And not just today, but well into the future. Your business and revenue model depend on it.
Contracts, then, are an important part of your business structure. And they can be complicated. Terms often include processing charges, revenue sharing, material value determination, the acceptable material mix, to name a few. Understanding how each of these elements impacts the business will help determine your revenue potential and your revenue split.
For example, MRF operators often aim for anchor supply contracts with larger material suppliers. The most common type of anchor contracts exists between MRFs and municipalities. This provides a guaranteed base of material flow, as well as revenue. Any additional materials from other sources just add to the revenue stream.
In this type of contract, there are fixed processing fees high enough to cover all facility operating expenses. And a bonus is modest positive EBITDA generation without commodity contribution.
This contract structure insulates MRFs from commodity price swings. The tradeoff is sharing the commodity upside with the supplier. But it allows for more aggressive debt financing to construct the facility and more stable profitability.
Consider the partners you’ve worked with in the past, and contracts that have been in place. Now identify the types of provisions you need to include to keep your business humming along.
4. Financing
Every capital-intensive operation requires financing.
Financing provides flexibility, better cash flow and liquidity. It also allows the business to conserve capital and weather market fluctuations.
When considering financing applications, there are four key factors to focus on.
First, the source of funds. Traditional bank financing tends to require more equity at lower rates. Whereas private lenders have higher risk tolerance and are willing to accept less equity at higher rates. Explore all your options and consider which type of financing best aligns with your business goals.
Second, repayment terms. The loan should amortize before the end of the useful life of the facility or equipment. Otherwise, additional investment may be required before the loan is paid off.
Third, security of the loan. The financier can take a security interest on just the MRF facility or on the business as an entity. Further, a bank may require additional collateral or pledges, like a personal or corporate guarantee. Make sure you’re comfortable with the amount of personal or business risk you’re taking.
Fourth, covenants. With financing comes conditions. The financier may require certain financial or operational covenants as a condition of the loan. Be sure you’re willing to / can meet these conditions before partnering with a financier.
Prior to seeking financing, you must begin by developing a sound business plan for your investment in an MRF. Include a conservative, multi-year projection model showing the investment profitability will repay the loan within a five- to seven-year timeframe, targeting less than a five-year ROI.
Build your case for material volumes, consistency, quality and contractual supply. Keep in mind to sensitize your model for inflation and down-turns in commodity prices and/or volumes. Understanding the impact of each decision will set up your MRF for the best financing terms.
Based on Comerica’s expertise in the industry, we can offer competitive terms, flexible to the needs of the company, and in some cases, provide 100% financing on investments.
5. Success
When due diligence is done properly, MRFs have a proven track record of success.
Let’s look at one example.
Comerica has a customer that is a privately held, family-owned company operating in the South Atlantic region. This company chose to specialize in waste hauling, recycling and disposal.
Throughout the journey, Comerica’s Treasury Management solutions optimized the company’s working capital, improving their cashflow and paying vendors more efficiently, while implementing the essential controls to address fraud concerns.
Comerica’s Environmental Services Department (ESD) provided credit solutions that enabled the customer to execute its business plan by providing financing for the development of their transfer stations, material recycling facilities and building out their hauling division.
Through the company’s partnership with Comerica, the company achieved its 5-year business plan in less than 24 months:
- Acquired four transfer stations and built out two processing facilities
- Grew roll-off business by 400%
- Company quadrupled its EBITDA
- Owner’s equity value increased 5x
The Bottom Line
Still thinking about whether to open an MRF?
This article highlights critical frameworks for due diligence and essential questions you’ll need to ask to move your business into the green (both environmentally and financially). By considering these factors upfront, you can set yourself up for long-term success with a thriving MRF business.
It’s a big decision and an even bigger commitment. Make sure you have the right partners to help you achieve your business goals.
Comerica understands the waste management industry. Over 50% of Comerica’s Environmental Services customers operate MRFs. When it comes to financing and planning, our advisors specialize in designing flexible capex financing solutions, optimizing acquisition funding and other tailored solutions to help waste management businesses succeed.
Next Steps
Contact Comerica at 888-980-5495 if you’re looking for a financing partner who will treat your business like their own.
Disclosures:
Member FDIC. Equal Opportunity Lender.
This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice.
This article is provided for informational purposes only. While the information contained within has been compiled from source[s] which are believed to be reliable and accurate, Comerica Bank does not guarantee its accuracy. Consequently, it should not be considered a comprehensive statement on any matter nor be relied upon as such.
