What Is a Commercial and Industrial (C&I) Loan?
6 MIN READ
Published October 19, 2023 | Updated November 09, 2023
Businesses use a commercial and industrial (C&I) loan for industrial or commercial purposes. These loans offer funding that can be used to finance capital expenditures, such as machinery purchases or for working capital.
C&I loans are typically short-term loans backed by collateral with variable interest rates. These loans are different from commercial real estate (CRE) loans, which are mortgage loans for commercial property purposes.
What Is a C&I Loan?
Lenders give C&I loans to corporations, partnerships, and sole proprietors for business needs, such as hiring, purchasing inventory, or equipment investment. These loans are usually secured, but some lenders may also offer unsecured funding. The loan funds can be given out as a lump sum or a revolving line of credit. You’ll be able to get this type of loan from community banks, credit unions, and lenders specializing in industrial lending.
“C&I Loans are typically the first option a private business owner uses to find funding for their operations, inventory, and expansion plans,” explains Brad Reichert, debt expert and founder and managing director of Reichert Asset Management LLC. “These loans allow businesses to bypass the expensive and labor-intensive process of issuing equity and/or debt securities in the global financial markets (also known as going public),” Reichert adds.
How Does It Work?
Before undertaking any type of business debt, it’s important to understand how it works. C&I loans are easy to qualify for, but you must offer collateral. You’ll also need to prepare a loan proposal to get the loan, which can include:
- Cash flow and income projections
- Business and personal financial statements
- Loan request
- A management and business experience profile
Different lenders may call this type of loan by different names. For example, working capital and seasonal loans are usually available for shorter credit terms of 12 months. Term business loans can help acquire vehicles or equipment for longer terms.
C&I loans usually have variable interest rates tied to the bank's prime or benchmark rates. Lenders will also require satisfactory collateral maintenance and may have covenants like debt service coverage ratio (DSCR) in place.
Benefits of Getting a C&I Loan
C&I loans can help businesses in a number of ways, from getting funds to meet their financial needs to flexibility in repayment terms.
Access to Capital
C&I loans can give businesses access to funds to expand their operations and maintain working capital. It can help them improve profitability and capitalize on opportunities.
Unlike personal loans for business, C&I loans offer a lot of flexibility regarding repayment. It can be a term loan with monthly payments or a line of credit you can use when needed. The funds can also be used in a number of ways to grow your business.
No Need for Investors
If you need access to funds quickly, a C&I loan can provide you with funding directly without equity investors. If a lender is reasonably assured that you’ll repay the loan and if you’ve got collateral, you can get a loan quickly. You’ll need a solid business plan with an investor to get funding.
Risks Associated With C&I Loans
As with any other loan, C&I loans come with a few potential risks that you should be aware of.
Risk of Default
Once you take out a loan, you must keep up with the payment schedule. You may be at risk of default if you borrow more than you can afford. Since most C&I loans are secured, you may lose your collateral if you do not repay.
C&I loans usually have variable interest rates, which can get quite high due to market fluctuations and economic conditions. This may impact your ability to repay the loan and make borrowing risky.
While getting an unsecured C&I loan is possible, many lenders will require you to put down collateral. When you use your business’s vehicle, equipment, or other assets as collateral, you risk losing if you default. This can have a negative impact on your business operations.
Is Your Business Eligible for a C&I Loan?
The eligibility criteria for C&I loans may be slightly different for each lender. You'll have to satisfy a few common requirements to be eligible.
Business Size and Type
Lenders offer C&I loans to businesses of all sizes. Large corporations may use the loan funds, but they may also be able to issue equity shares and bonds for funding. However, medium and small businesses do not have this option. They rely on C&I loans to fund their expenditure and cash flow needs.
Businesses can use loan funds at any time during the life of the business, such as for getting started and running, funding the purchase of property, or setting up a new production line.
Most lenders will review your creditworthiness to determine if you’re applying for the loan. Whenever you apply for a business loan, lenders will ensure you’ve got a good credit score and a strong repayment history. They also prefer borrowers that keep their outstanding debts low.
Financial Statements and Documentation
When applying for a loan, you must provide relevant statements and documentation to support your application. You’ll need to create a loan proposal with documents like:
- Business profile
- Cash flow and income details
- Financial statements
- Collateral details
The lender will use these documents to determine your eligibility for a loan.
How To Apply for a C&I Loan
The exact requirements for the loan will depend on your situation, but it’s better to be prepared before you apply.
- C&I loans are usually a form of secured debt, so you’ll need to offer collateral.
- If you don’t have collateral, check to see if your lender will accept a personal guarantee.
- You may also be able to use a co-signer to secure the loan.
- You’ll need to complete an application package, which may include a business plan, financial statements, and necessary documents.
- Once you submit the completed application package to the loan officer, it’ll go through underwriting, and you’ll receive a decision on the application.
Who Offers C&I Loans?
You can find a C&I loan through a variety of financial institutions, including:
- Large and small commercial banks commonly offer a variety of lending products, including C&I loans.
- Credit unions may offer these loans at competitive rates to members.
- Many online lenders specialize in C&I lending for small and medium-sized businesses with faster approvals.
- You may also be able to find C&I loans through alternative commercial lending options such as marketplace lenders and peer-to-peer lending.
The Bottom Line on C&I Loans
C&I loans are short-term, secured loans for businesses. Lenders usually issue loans to companies, but if the funds are used for business purposes, they may give a loan to an individual. Loans secured with real estate or issued to agricultural producers and financial institutions are not considered C&I loans.
C&I loans come with variable interest rates, which may be high and impact a business’s ability to repay. It’s important to assess what you can comfortably afford as a monthly payment before applying for a loan.