What Is a Commercial and Industrial (C&I) Loan?
Great ideas for growing your business need funding and Commercial and Industrial loans are a great way to fund that expansion. Commercial and Industrial Loans (called C&I loans) are loans to businesses (not to individuals). They are usually short-term loans, with collateral required. The loan rates are tied to the prime rate or LIBOR.
Commercial and Industrial (C&I) loans are an important—and growing—part of U.S. banking offerings for businesses. As of March 2018, over $2,122 billion in loans were in place, up from $1,065 billion in 2000.
Why have C&I loans become so popular? According to American Banker, "Bank lending is especially important for smaller businesses that are unable to fund investment by issuing bonds or stock." Because they are short-term, these loans are used primarily for working capital or purchase of capital equipment for startup or expansion, not including real estate.
C&I Loans Pros and Cons
C&I loans are popular because it is easier to take on debt by getting a business loan than it is to have equity investors. It takes a great deal of time and money to gather up investors, and having investors means having someone else looking over your shoulder.
Financing growth and expansion by using debt—a C&I loan—can be done quickly if you have the necessary collateral and loan application documents. The disadvantage of debt is that it must be paid off, and debt service (interest expenses) can be high. Your business must continue to pay off the loan, taking away cash needed for operations.
What Are C&I Loans Used For?
There are times in the life of a small business when extra funding is needed when finding a C&I loan might be helpful:
Working capital. Working capital loans are short-term loans to help a business with cash-flow needs. Two times in the life of a business when it might need extra cash are at startup and during expansion. At these times, the outflow of cash is greater than cash coming in, until new customers and payments can be generated.
Capital financing. To expand and grow, small businesses need new equipment and machinery and other capital (property) items. A C&I loan can help open a warehouse, set up a production line, make repairs or renovations to existing facilities, furnish a retail store, or purchase an inventory of products.
Acquisitions and mergers. Your business might want to join with a supplier to produce a new product or combine with a competitor in a joint venture. Funding these business ventures with C&I loans is a good way to grow your business.
What Do I Need to Get a C&I Loan?
Collateral. As noted above, you will need collateral—assets you can contribute to get a loan. If you are buying equipment or vehicles, they can be used as collateral.
Personal Guarantees. If you are in a startup situation, you may not have collateral. It's difficult to get a C&I loan without collateral, but you might be able to find a lender who will take a personal guarantee. You may need to pledge some personal assets.
Co-signer. If all else fails, you may be able to find someone who will co-sign your C&I loan. This person will need to have some personal or business assets to use as collateral.
Documents and Application. You will need to complete a package of documents for the loan. To begin with, you will need a business plan showing the amount you need, what it will be used for, and how you plan to pay it back. You will also need financial statements showing your past business performance and business (and maybe personal) tax returns for several years.
How Do C&I Loans Compare With Other Business Loans?
Some other business loans you might consider:
Commercial Real Estate (CRE) loans are for the purchase of business real estate; they are the equivalent of a mortgage loan for personal real estate. These loans are longer-term loans, using the real estate as collateral.
A line of Credit. A credit line is a way to put cash in your business bank account, and its advantage is that you only pay interest on the amount you take out. A credit line may be secured or not secured, based on the circumstances; non-secured credit is financed at a higher interest rate.
Factoring is a way to get funding by using accounts receivable as collateral. The receivables are steeply discounted, but you can get the cash quickly.
Can I Get an SBA C&I Loan?
While the Small Business Administration (SBA) doesn't loan directly to businesses, you may be able to get SBA assistance with a C&I loan. You might want to consider an SBA-guaranteed 504 loan, which can be used for equipment or expansion. This article from The Balance has information on several of these SBA-guaranteed loan programs.