Choosing the appropriate financing solutions as your company expands can help your business operations run more smoothly.

Steve Arentsen, Group Director, Waste and Recycling

March 5, 2024

4 Min Read
Andrii Yalanskyi / Alamy Stock Photo

The $73 billion1 North American municipal solid waste industry is a capital and equipment-intensive sector. This demands that companies make crucial decisions about how to fund ongoing capital expenditures and growth.

Traditionally, companies operating with 50 or fewer front-line collection vehicles have appropriately funded fleet and equipment purchases utilizing traditional equipment leases and/or term loans.

  • Leasing alternatives generally offer fixed-rate financing of specific equipment with up to 7-year repayment schedules.

  • Equipment term loans are commonly structured as floating rate obligations and may include a designated interest-only draw period, after which any outstanding loan balances are converted to a fully amortizing term loan.

Although these financing alternatives have proven effective, as a municipal solid waste company’s operations increase beyond $20 – $25 million in annual revenue and become more diversified, financing options can become more flexible, particularly when an industry- knowledgeable lender is engaged. This happens because industry-focused lenders offer financing structures based on the value of the company’s predictable, recurring cash flow rather than hard asset values.

The flexibility of a cash flow lending structure can be enhanced if a company’s collection operations are integrated with permitted waste transfer/processing and/or disposal facilities, given the incremental margin capture and expense control that vertical integration in the solid waste industry provides.

Evolving to a cash flow lending structure

Based on a company’s scale and business mix, a popular industry-appropriate lending structure involves a multi-year, general purpose revolving credit facility. Revolving credit facilities typically have the following key structural features highlighted below:

  • An agreed upon borrowing limit that can be paid down and re-borrowed based on maintenance of agreed to financial covenants tied to cash flow, not asset values.

  • Required payments include interest, monthly or quarterly, with repayment of outstanding principal due at maturity, typically 3-5 years. In many cases, revolvers are renewed with outstanding principal rolled over.

  • Borrowing proceeds under a revolver structure are available to fund working capital, capital expenditures, acquisitions, and other growth initiatives.

  • A revolving credit facility of this kind is often initially paired with a consolidation term loan, under which, some or all the company’s existing term debt is refinanced on a single amortization schedule, simplifying ongoing loan administration.

As opposed to a leasing or similar asset-based financing structure (under which specific assets are financed and maintenance of monthly principal and interest payments are the primary requirements to maintain compliance with the financing agreement), a cash flow structure with a large revolving credit facility component requires more limited principal payments in exchange for the borrower agreeing to maintain agreed-upon financial covenant levels. Typically, the primary financial covenants included under a cash flow lending structure are:

  1. Cash Flow Leverage – Typically defined as Total Funded Debt divided by trailing 12-month EBITDA (earnings before interest taxes, depreciation, and amortization); and

  2. Fixed Charge Coverage – Measures the company’s ability to service required debt payments and is typically defined as EBITDA, less taxes, distributions, and unfinanced capex divided by required principal and interest payments during the measurement period.

Financial covenants are set at levels intended to allow for ongoing refinance/ renewal of the revolver at maturity.

Cash flow lending structures greatly simplify a company’s typical equipment financing cycle

Under an equipment lease or term loan financing structure, individual assets are financed with the resulting debt amortized as required from ongoing operating cash flow generated by the business. Given operating cash flow is utilized to service scheduled monthly principal and interest payments, new truck purchases require documenting a new equipment loan or lease for each material capital outlay.

By contrast, under a cash flow revolver structure, trucks and equipment are purchased with draw-downs from the revolver. Given they are not placed on an amortization schedule, operating cash flow can be utilized to pay down the revolver, thereby refreshing availability for additional, incremental truck and equipment funding later without documenting a new loan, so long as compliance with the agreed-upon financial covenants are maintained.

Another benefit of a cash flow structure is its scalability. As the company and its cash flow grow, the financing commitment can scale accordingly, assuming covenant ratios are maintained. Consequently, borrower loan administration and origination activities can be greatly reduced, freeing up management to focus on business operations versus financing activities.

Find a lender who knows your business

Clearly, one size does not fit all when it comes to financing ongoing operations and growth initiatives within the solid waste industry. That’s why, in addition to understanding financing options, it is equally important to work with a lenderthat has extensive waste industry expertise.

Steve Arentsen is Wells Fargo’s Waste & Recycling Industry Group director. Arentsen has 30 years of experience in commercial banking. He can be reached at [email protected].

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About the Author(s)

Steve Arentsen

Group Director, Waste and Recycling

Steve Arentsen is the Waste & Recycling Group Director at Wells Fargo.

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