What Are Commercial and Industrial (C&I) Loans?

Commercial and industrial (C&I) loans are loans for businesses. They are usually short-term, secured loans, but they do not need to be.

Here's what you need to know about C&I loans, along with some tips for securing one.

What Are C&I Loans?

Commercial and industrial (C&I) loans include most loans that are issued for business purposes. These loans are usually issued directly to businesses, rather than to individuals. A loan to an individual could qualify as a C&I loan, but only if the entirety of the loan is used exclusively for commercial, industrial, and professional purposes.

Not all loans to businesses are considered C&I loans. Loans that are secured by real estate are excluded from this category. Any loan to a financial institution is also excluded from this category, as are loans to farmers or anyone else involved in agricultural production.

How Do C&I Loans Work?

When it comes to business, having a great idea isn't enough. Your business needs funding to realize those ideas, and C&I loans are a great way to fund that expansion.

C&I loans aren't the only way businesses can receive financing, but they're one of the more accessible options. Businesses can, in theory, receive equity financing by finding new investors, or they can issue bonds. In reality, many small businesses can't issue stocks or bonds.

Most C&I loans are short-term and secured by some kind of collateral (aside from real estate). The loan rates are tied to the prime rate or LIBOR. 

What Are C&I Loans Used For?

C&I loans don't have to be used for anything specific—as long as the use is directly tied to a business. However, there are some common uses.

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, at least until new customers and payments can be generated. 

Capital financing: To expand and grow, small businesses need new equipment and machinery and other capital 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.

Alternatives to C&I Loans

C&I loans aren't the only way a business can acquire credit. Consider these alternatives.

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 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 unsecured, though unsecured credit will likely come with 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.

How Do I Get a C&I Loan?

There are a few things you may or may not need to get a C&I loan. Your requirements will depend on your personal situation, but it's better to over-prepare for your application process.

Collateral

You will likely need collateral—assets you can contribute as security for the loan. Loans that are secured with assets are easier to get and have lower interest rates. Unsecured loans are difficult for startups to get. Lenders want collateral they can sell to recover at least some of the loan amount if the lender doesn't pay or goes bankrupt. The amount of collateral needed depends on the loan amount.

If you are buying equipment or vehicles, those items can be used as collateral. Inventory and accounts receivable (money owed to your business by customers) are also potential sources of collateral. During the loan process, the lender will value the asset and discount it to account for the loss of value if it must be sold quickly.

Personal Guarantees

If you are starting your business, 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 in this scenario.

Co-Signer

If all else fails, you may be able to find someone who will co-sign your company's 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.

Necessary documents will likely include financial statements that show your past business performance. Lenders will want to see business (and maybe personal) tax returns for several years. Some lenders ask for a "sources and uses of funds" statement. Even though the C&I loan is for your business, you will also need to give the lender personal financial documents, including a personal financial statement.

SBA Assistance

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.

Pros and Cons of Commercial & Industrial Loans

Pros Explained

• Easier to get than equity financing: C&I loans are popular because it is easier to finance business growth with debt than with equity. A bank will give you a loan as long as they feel reasonably assured that you'll repay it. An investor, on the other hand, will only invest if they feel you have a solid business plan with serious growth opportunities.
• Quick: 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. Even if you have a compelling business idea, equity financing would still require a lot of time spent finding potential investors and convincing them to become shareholders.

Cons Explained

• The loan must be repaid: The loan 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.
• Collateral places assets at risk: If you are unable to meet your debt obligations for some reason, you could lose whatever assets you had to offer as collateral for the loan.