Commercial and Industrial (C&I) Loan

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 give companies funds that can be utilized for different purposes, including working capital or to finance capital expenditures like purchasing machinery.

Commonly, 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 normally have variable rates of interest that are tied to the bank prime rate or another benchmark rate like the London Interbank Offered Rate (LIBOR). Numerous borrowers must likewise file customary financial statements, which could be quarterly or yearly, contingent upon the bank's requirements. Lenders generally require legitimate maintenance of the loan collateral and hold borrowers to certain contracts, for example, a debt service coverage ratio (DSCR).

Albeit large corporations might take out C&I loans, they additionally approach the financial markets for funding by giving bonds or equity shares. Nonetheless, numerous small and medium-sized businesses don't approach giving stock shares since they may not be traded on a stock exchange. Thus, these small and mid-size companies use C&I loans to fund their cash flow and expenditure needs.

C&I loans are not quite the same as commercial real estate loans (CRE), which are mortgage loans utilized for commercial property purposes, including offices and inns. Likewise, C&I loans are not equivalent to consumer loans since no one but businesses can get commercial and industrial loans.

Upsides and downsides of C&I Loans

C&I loans permit businesses to sidestep the commonly long and burdensome course of scrounging up equity investors. In addition to the fact that it is more expensive and tedious to get equity investors, however being a public corporation means being accountable with those investors and complying to extra regulations from the U.S. Securities and Exchange Commission (SEC). With the important collateral, C&I loans can assist companies with raising funds required for expansion.

Nonetheless, C&I loans should be paid off, and at times, inside a couple of years. Likewise, in the event that the interest rate is high, debt servicing costs can upset a company's cash flow, detracting from the business' working capital.

How Businesses Use C&I Loans

C&I loans can be utilized whenever in the life of a business when it needs to generate cash. For instance, a startup might take out a C&I loan to make ready on the grounds that 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 additionally valuable to assist businesses with funding the purchase of capital property, similar to machinery and equipment. They can be utilized to purchase and remodel new facilities, buy inventory, outfit a retail store or set up a production line. The funds can likewise be utilized to join a contender or provider in a joint venture.

Tracking C&I Loans

The Federal Reserve Board of Governors monitors all C&I loans in the country. Growth in C&I loan outstanding will in general correspond with Gross Domestic Product (GDP) growth. Economic downturns and recessions can impact the level of C&I loan issuance.

Likewise, banks will generally 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 instance, in a recession, companies might experience a decline in revenue due to less demand for their product or service. On the off chance that companies can't repay the loans, banks might cut the supply of new C&I loans. Accordingly, monitoring new C&I loan issuance and the number of loans in default can be an effective indicator of the financial wellbeing of companies and the overall economy.

Revision — April 1, 2022: A previous rendition of this article misquoted the total amount of outstanding C&I loans in the U.S.

Highlights

• C&I loans are not quite the same as commercial real estate loans (CRE), which are mortgage loans utilized for commercial property purposes.
• Commercial and industrial loans furnish companies with funds that can be utilized for working capital or to finance capital expenditures like purchasing machinery.
• A commercial and industrial (C&I) loan is a loan made to a business or corporation.
• Normally, C&I loans are short-term loans with variable interest rates backed by collateral.