Scrap and recycling finance when your inventory reprices daily

A scrap yard buys at a price it sets today, in cash, and sells at a price the market sets later. The inventory between those two events is the business's largest exposure and the hardest thing in the trade to finance, because its value changes while nobody is looking at it.

Now move the price between purchase and settlement:

• Down 8 per cent: sale 111,798, margin 20,038.
• Down 14 per cent: sale 104,507, margin 12,747.
• Down 22 per cent: sale 94,786, margin 3,026.

Break-even on the purchase price alone is a 24.5 per cent fall. Add 18 a ton of processing and freight and break-even is a 15.3 per cent fall. A month is long enough for that to happen.

That is the whole risk model, and every financing decision in the trade should be read against it.

Why the borrowing base is conservative

An asset-based lender looking at scrap inventory faces three problems at once.

Where the financing actually comes from

The cash-at-the-scale problem

Paying for scrap is heavily regulated in most states, and the rules have tightened over the years in response to metal theft. Depending on the jurisdiction, dealers may face:

• Registration or licensing as a scrap metal dealer or recycler
• Seller identification requirements, photographs of the material or the seller, and vehicle details
• Record retention for a set period, and reporting to a law enforcement database
• Holding periods before purchased material may be processed or resold
• Limits on cash payment, including thresholds above which payment must be by cheque or traceable means, and in some states a prohibition on cash for certain categories of material such as catalytic converters or copper

These rules change frequently and differ substantially between states and even municipalities. Confirm the current requirements with your state regulator. For financing, they matter in three ways: a holding period lengthens your inventory cycle and therefore your price exposure; cash payment limits change your working capital pattern; and a compliance failure is a licensing risk that a lender will treat as an existential one.

Separately, cash-intensive operations attract scrutiny on deposit patterns and on federal cash reporting obligations for payments received in a trade or business. Know what applies to you and document it.

How to reduce the exposure rather than finance it

1. Shorten the cycle. Days between purchase and shipment is the single variable that determines how much price risk you carry. A yard turning inventory in 12 days has half the exposure of one turning in 24.
2. Price the buy off the forward, not the spot. If the mill settlement is 30 days out, the buy price should reflect the price you expect to realise, less processing, less freight, less a margin for the move. Many yards price off today's sell number and are surprised monthly.
3. Ship more often in smaller lots where freight economics allow. It costs more per ton and removes price risk.
4. Use contracted pricing where it is available. A monthly contract price with a mill converts an unknown into a known for that tonnage.
5. Watch the grade mix. Margin varies enormously between grades and between ferrous and non-ferrous. A yard tracking blended margin per ton is not managing the business; it is observing it.

What to have ready for a lender

Monthly tonnage by grade, in and out, for 24 months. Realised price per ton by grade against the published index for the same period — this shows your discount to index, which is the most informative single measure of a yard's commercial performance. Inventory on hand by grade with an ageing. Receivables ageing by customer. Your equipment schedule. Your licences and compliance records. An environmental assessment on any owned property. And your average days from purchase to shipment, which is the number that tells a lender how much price risk sits inside the borrowing base.

Ask a prospective lender how inventory will be marked, how often, and what happens to availability when the index falls — whether there is a cure period or an immediate paydown obligation. Refuse a facility that marks inventory to the index weekly with an immediate paydown requirement and no cure, unless your receivable line alone can carry the business through a bad month. In this trade, the covenant that kills you is not the one about earnings; it is the one that reprices your collateral faster than you can sell it.