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

A commercial and industrial (C&I) loan is any loan made to a business or corporation, as opposed to an individual. Commercial and industrial loans provide either working capital or 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 collateral.

As of March 2018, businesses and corporations in the United States have taken out more than $2,122 billion in C&I loans. These loans have become more popular over the last 20 years, as they provide a means for smaller businesses to generate working capital or finance expenditures.

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.

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 doing so also means being accountable to those investors. With the necessary collateral, C&I loans can provide a quick means of raising funds needed for expansion.

However, C&I loans need to be paid off, usually within a year or two. Interest, also known as debt service, can be high, and the cash used to pay off the loan takes 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 small business when it needs to generate quick cash for working capital, acquisitions, and mergers, or capital financing. A startup may take out a C&I loan to get up and running, because the outlay of cash at startup is typically much greater than the inflow, at least until the business starts attracting customers. C&I loans are also used to help small businesses fund growth and expansion.

These types of loans are also useful to help small businesses fun the purchase of capital property, like machinery and equipment. They can be used to purchase and renovate new facilities, purchase inventory, furnish a retail store or other premises, or set up production. They can also be used to join with a competitor or supplier in a joint venture.

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 the production of goods.