Commercial and Industrial (C&I) Loan: Definition, Uses, Vs. CRE

What Is a Commercial and Industrial (C&I) Loan?

A commercial and industrial (C&I) loan is a loan made to a business or corporation. Commercial and industrial loans provide companies with funds that can be used for various purposes, including working capital or to finance capital expenditures such as purchasing machinery.

Typically, C&I loans have variable interest rates and are backed by collateral. As of February 2022, businesses and corporations in the United States had more than $2.48 trillion in C&I loans outstanding.

How Commercial and Industrial (C&I) Loans Work

Commercial and industrial loans usually have variable rates of interest that are tied to the bank prime rate or another benchmark rate such as the London Interbank Offered Rate (LIBOR). Many borrowers must also file regular financial statements, which could be quarterly or annually, depending on the bank's requirements. Lenders usually require proper maintenance of the loan collateral and hold borrowers to certain covenants, such as a debt service coverage ratio (DSCR).

Although large corporations may take out C&I loans, they also have access to the financial markets for funding by issuing bonds or equity shares. However, many small and medium-sized businesses do not have access to issuing stock shares since they may not be traded on a stock exchange. As a result, these small and mid-size companies use C&I loans to fund their cash flow and expenditure needs.

C&I loans are different from commercial real estate loans (CRE), which are mortgage loans used for commercial property purposes, including offices and hotels. Businesses might also use mini-perm loans to cover the gap until a commercial property becomes profitable.

Also, C&I loans are not the same as consumer loans since only businesses can get commercial and industrial loans.

Pros and Cons of C&I Loans

C&I loans allow businesses to bypass the typically long and arduous process of drumming up equity investors. Not only is it more costly and time-consuming to obtain equity investors, but being a publicly-traded company means being accountable to those investors and adhering to additional regulations from the U.S. Securities and Exchange Commission (SEC). With the necessary collateral, C&I loans can help companies raise funds needed for expansion.

However, C&I loans need to be paid off, and in some cases, within a few years. Also, if the interest rate is high, debt servicing costs can hinder a company's cash flow, taking away from the business’s working capital.

How Businesses Use C&I Loans

C&I loans can be used at any time in the life of a business when it needs to generate cash. For example, a startup may take out a C&I loan to get up and running because the outlay of cash at the onset can be greater than the revenue generated from sales. The loan can be paid down as the company generates revenue.

C&I loans are also useful to help businesses fund the purchase of capital property, like machinery and equipment. They can be used to purchase and renovate new facilities, buy inventory, furnish a retail store or set up a production line. The funds can also be used to join a competitor or supplier in a joint venture.

Tracking C&I Loans

The Federal Reserve Board of Governors keeps track of all C&I loans in the country. Growth in C&I loan outstanding tends to correlate with Gross Domestic Product (GDP) growth. Economic downturns and recessions can impact the level of C&I loan issuance.

Also, banks tend to reduce the supply of C&I loans when there's an increase in credit risk or the risk that the borrower may default on the loan. For example, in a recession, companies may suffer a decline in revenue due to less demand for their product or service. If companies cannot repay the loans, banks may cut the supply of new C&I loans. As a result, monitoring new C&I loan issuance and the number of loans in default can be an effective indicator of the financial health of companies and the overall economy.

Correction—April 1, 2022: A previous version of this article misstated the total amount of outstanding C&I loans in the U.S.