What Is a Commercial and Industrial (C&I) Loan?
A commercial and industrial (C&I) loan is any type of loan made to a business or corporation, as opposed as to an individual. Commercial and industrial loans can be made in order to provide either working capital or to finance capital expenditures such as machinery or a piece of equipment. This type of loan is usually short-term in nature and is almost always backed by some sort of collateral.
How Commercial and Industrial Loans Work
Commercial loans usually charge flexible rates of interest that are tied to the bank prime rate or LIBOR. Many borrowers must also file regular financial statements, at least annually or more frequently in the case of borrowers that carry higher risk. Lenders usually require proper maintenance of the loan collateral property and hold borrowers to certain covenants such a debt service coverage ratio (DSCR).
Small and medium-sized businesses make up the bulk of borrowers for C&I loans because they generally cannot generate sufficient cash flow to continuously self-fund operations and because they lack the access to the equity and bond markets that large companies enjoy.
To further refine the definition of C&I loans, they are distinct from consumer loans and real estate loans. Banks break out these loan categories in their financial statements.
Tracking Aggregate 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 is positively correlated with GDP growth, and there is evidence that downturns in C&I loan activity roughly coincide with economic recessions. However, this relationship, if valid, may weaken as the domestic economy continues to migrate toward services and away from production of goods.