Scrap Metal Recycling Business Plan

By Muhammad Tayyab Shabbir, Business Plan Firm, the US practice of Avvale. Last updated 11 October 2026. Primary sources: SBA SOP 50 10 8.1, the 2022 NAICS Manual, 40 CFR 122.26, 40 CFR 82.155 and 40 CFR 63.10685, retrieved 5 to 10 October 2026.

Whichever of the four NAICS homes we found for a scrap yard applies, Appendix 6 of SOP 50 10 8.1 lists it with no condition. By main activity under the 2022 NAICS Manual, wholesaling scrap falls under entry 42393, sorting commingled recyclables under 562, dismantling vehicles to sell the parts under 42314 and smelting under 331. Where commercial real estate is offered as security, a leasehold included, and its current or a known prior use matches, the Environmental Investigation "must begin with a Phase I, regardless of the amount of the loan", so the Environmental Questionnaire start for loans up to $250,000 is closed. On a yard that has operated for decades, budget for a Phase II too.

Verify every requirement with the named agency and your lender before committing capital. We are not a lender, attorneys or an Environmental Professional. We have not surveyed any state or local requirements on zoning, air permits or seller identification, or what equipment and a site cost where you are.

Which Appendix 6 entry covers a scrap yard?

SOP 50 10 8.1, effective 1 October 2026, carries Appendix 6: NAICS Codes of Environmentally Sensitive Industries. We found four homes for a scrap metal operation in the 2022 NAICS Manual, each defined by what an establishment is primarily engaged in:

None of the four entries carries a conditional bracket. The Appendix says "A 3 digit NAICS code includes all industries beginning with those 3 digits", and the same of 5 digit codes, so each entry takes in the industry beside it.

For one establishment these are alternatives, not layers. The Manual's cross-references keep them apart: "Sorting, breaking up, and wholesaling scrap metal without also smelting or refining" is classified in 423930, not in the smelting industries, and the entry for 562920 sends merchant wholesalers of recyclable materials back to 423930.

The lender assigns the code, by "making a Good Faith effort to determine the NAICS code(s) for the Property’s current and known prior uses". Among these four, the choice does not change the result: each one is a match.

What that costs you

The questionnaire start is closed. The policy (Section A, Chapter 5, Paragraph E) covers "all commercial Property upon which a security interest such as a mortgage, deed of trust, or leasehold deed of trust is offered as security for a loan or debenture", so it follows what the lender takes as security, owned land or a leasehold (see our SBA environmental requirements guide). Where no listed use matches, "If the loan amount is up to and including $250,000, the Environmental Investigation may begin with an Environmental Questionnaire." For a match to an "environmentally sensitive industry identified in Appendix 6", the investigation "must begin with a Phase I, regardless of the amount of the loan", conducted to "the most recently adopted standard for a Phase I ESA established by ASTM International, currently ASTM E1527-21" (Appendix 4). The only Property outside the NAICS step is a unit in a Multi-Unit Building, which Appendix 4 defines as non-industrial.

And the Phase I is not the end of it. If the Environmental Professional "concludes that further investigation is warranted (typically a Phase II), and the SBA Lender still wants to make the loan, the SBA Lender must proceed as recommended by the Environmental Professional", or seek an exception to policy from SBA. And "Loans may not be approved or disbursed if there is known Contamination or on-going Remediation at the Property unless the risks have been minimized to the satisfaction of SBA."

Our advice on an established yard: budget for a Phase II, and get a view on remediation exposure before you agree a price. Paragraph E gives you terms to price against:

• "SBA will require compliance with all of an Environmental Professional’s recommendations", housekeeping measures such as secondary containment and sealing floor drains included.
• Where there is Contamination or on-going Remediation, "approval or disbursement may be considered" with an escrow account, controlled by the 7(a) Lender or the 504 first mortgage holder as trustee, that "equals a minimum of 150 percent of the total estimated cost of required Remediation". "The source of the escrow funds may not be SBA Loan proceeds."
• "Environmental Investigation Reports must be dated within one year of the date of issuance of the SBA loan number." Check the date on any Phase I a seller hands you.

Buying an operating yard versus starting clean

This is the central strategic decision and it is mostly an environmental one.

An operating yard can come with scales, a weighbridge, customer relationships and a site already zoned for the use; ask each agency which permits pass to a new owner. It also comes with its history, because the NAICS step covers the Property's known prior uses as well as its current one.

A greenfield site has no yard history, but whether a scrap use is allowed there is a local zoning decision we cannot predict, and its own known prior uses are still compared with Appendix 6.

Neither is obviously right. What is wrong is choosing between them without having priced the environmental tail on the first option, and the planning risk on the second.

Is a scrap metal business profitable?

It is a commodity business, and your plan has to say so.

Your margin is the spread between what you pay at the scale and what you receive at the mill or the broker, less processing and freight. Both ends move with commodity prices that you do not set. What you control is how much cash sits in inventory, whether you process to a higher grade or sell mixed, and how much volume comes from contractors, demolition firms and manufacturers instead of walk-in public trade.

We have not surveyed yard economics and will not publish figures we have not measured. For a Standard 7(a) loan (greater than $350,000), Section B, Chapter 1 has the lender set out the assumptions behind projected cash flow, including as applicable "A comparison to current industry trends", plus an "Analysis of working capital adequacy, at a minimum over the next 12 months". Model a price downturn so your plan answers both.

The compliance layer your plan has to cover

• Stormwater. 40 CFR 122.26(b)(14)(vi) names "metal scrapyards, battery reclaimers, salvage yards, and automobile junkyards" as industrial activity. Under paragraph (c)(1), dischargers of that stormwater "are required to apply for an individual permit or seek coverage under a promulgated storm water general permit", unless the site qualifies for the no exposure exclusion in paragraph (g). Ask your state environmental agency which permit applies.
• Seller identification and theft prevention. We have not surveyed state or local law on this. Ask your state licensing agency and local police department what applies, including to copper and catalytic converters.
• Air permitting. Ask your state or local air agency whether a shredder or torch cutting needs a permit before you order equipment.
• End-of-life vehicles and appliances, if you take them. Under 40 CFR 82.155(b) the final processor of a small appliance, MVAC (motor vehicle air conditioner) or MVAC-like appliance, "including but not limited to scrap recyclers and landfill operators", must recover any remaining refrigerant or verify by signed statement or contract that it was recovered. Paragraph (c) has the final processor keep those signed statements or contracts on site for three years. For fluids and batteries, ask your state environmental agency.
• Mercury switches. 40 CFR 63.10685(b) binds electric arc furnace steel mills under EPA's area source standards, not yards. Under one of its three compliance options for scrap containing motor vehicle scrap, the mill must certify that it buys motor vehicle scrap only from "scrap providers who participate in a program for removal of mercury switches that has been approved by the Administrator". If you sell vehicle scrap to such a mill, ask which option it uses.

Name your actual arrangements in the plan: permit numbers, dates and who is responsible.

How do you fund a scrap yard?

For a 7(a) loan, the SOP's start-up test decides the equity injection, and it is about the business, not the operator. From Section B, Chapters 1 and 2 (Standard 7(a) and 7(a) Small):

SBA considers a business to be a “start-up” for the purpose of determining equity injection requirements if it has been in operation (i.e., generating revenue from intended operations) for 1 year or less.

A start-up's injection is at least 10 percent of total project costs, meaning "all costs required to become operational, regardless of the source of funds, except for lines of credit and 504 loans". For a yard that base is large: balers, shears, a weighbridge, material handlers and site works. On our reading vendor-financed equipment stays in it, because vendor finance is a source of funds, not an exclusion. SBA Express loans and purchases of an existing yard follow other rules: see SBA equity injection requirements.

The 504 program uses a different clock and a property test. Appendix 3 defines a New Business as one "in operation for 2 years or less at the time the loan is approved", and "New businesses must contribute at least 15%" of project cost, excluding administrative costs, against 10 percent otherwise (Section C, Chapter 1, Borrower's Contribution). Buying a long-established yard does not settle it. The same definition says a business more than 2 years old at approval "may be considered a New Business if it is a change of ownership that will result in new, unproven ownership/management and increased debt unrelated to business operations", and on a change of ownership "the CDC must review the management and level of debt in order to decide whether an additional Borrower’s contribution of 5% is necessary".

A Limited or Special Purpose Property also means 15 percent, or 20 percent for a new business. Appendix 3 defines one as a "limited-market property with a unique physical design, special construction materials, or a layout that restricts its utility to the use for which it was built". "Sanitary landfills" appears on the list of examples under Borrower's Contribution while scrap yards do not. The list "is not intended to be all-inclusive", and "CDCs must address whether the Project Property is Limited or Special Purpose in their credit memorandum and include an explanation of their conclusion", so it is a question to raise, not to assume. On a $1,500,000 project each step of 5 percent is $75,000. Our free SBA equity requirement calculator shows what each answer costs.

What must your scrap metal business plan contain?

• The environmental position first: the site's current and known prior uses, what real estate or leasehold is offered as security, who is doing the Phase I, and your view on remediation exposure.
• Commodity price sensitivity, modeled through a downturn rather than asserted.
• Working capital, month by month. You pay at the scale and get paid on settlement.
• Volume sources named: contractors, demolition, manufacturing offcuts, municipal contracts. Public walk-in alone is not a plan.
• Permits held or applied for, with dates.
• A project cost schedule covering all costs required to become operational, with the equity injection identified and documented.

We write SBA business plans and financial models for exactly this kind of filing, including the project cost build-up and the monthly cash flow a credit memorandum is written from. Fees are fixed and published, and we never charge a percentage of anything you borrow or raise.

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Frequently asked questions

Does a scrap yard need a Phase I environmental assessment?

For SBA financing secured on commercial real estate, yes on a match. Appendix 6 of SOP 50 10 8.1 lists scrap wholesaling (42393), sorting facilities (under 562), vehicle dismantling for parts (42314) and smelting (under 331), none with a condition. Where the Property's current or a known prior use matches, the Environmental Investigation "must begin with a Phase I, regardless of the amount of the loan".

Is it cheaper to buy an existing yard?

We have not surveyed prices. Under SOP 50 10 8.1 the lender compares the Property's current and known prior uses with Appendix 6, so an operating scrap yard brings its site history into the loan. Price the environmental exposure before agreeing terms, and the zoning risk on a new site.

Is a scrap yard a special purpose property for SBA?

Not by name. The SBA 504 Limited or Special Purpose Property list in SOP 50 10 8.1 names sanitary landfills, not scrap yards, and is not all-inclusive. Appendix 3 defines one as a limited-market property with a unique physical design, special construction materials or a layout restricting it to the use it was built for. The CDC must explain its conclusion in the credit memorandum.

What is the biggest funding obstacle?

In our view working capital, not equipment: a scrap yard pays sellers at the scale and is paid on settlement. For a Standard 7(a) loan, SOP 50 10 8.1 has the lender analyze working capital adequacy over at least the next 12 months, so show that cash cycle in your plan.

Am I a start-up if I have worked in scrap for twenty years?

For a 7(a) loan, yes, if the business has generated revenue from intended operations for 1 year or less: SOP 50 10 8.1 tests the age of the business, not the owner's experience. The 504 test is 2 years or less at approval, and an older business may be considered new on a change of ownership with new, unproven ownership/management and increased debt unrelated to operations.

This page summarizes SBA SOP 50 10 8.1, the 2022 NAICS Manual and the regulations cited above as retrieved from 5 to 10 October 2026. It is general information, not lending, legal or environmental advice, and it is not a commitment to lend. Rules change, and we have not surveyed any state or local scrap regulation. Confirm every requirement with the relevant agencies and your lender before you commit capital.

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