The key difference between C&I and CRE loans
Differentiating between C&I and CRE loans
- Commercial and industrial (C&I) loans are for operational and capital expenses, such as hiring more personnel or purchasing equipment.
- Commercial real estate (CRE) loans are exclusively for real estate purchases.
- C&I loans usually are not secured by real-estate collateral, and they may come in the form of a lump sum or a line of credit.
- Compared to home mortgage loans, CRE loans usually have shorter terms, lower loan-to-value ratios and include balloon payments.
Business owners should know that the reasons they want to borrow plays a role in the types of loans they can obtain.
For example, if you’re in need of immediate cash to bridge a seasonal gap in revenue, hire additional employees, purchase new equipment or upgrade the facilities on a property you already own, a commercial and industrial (C&I) loan is the best route for funding.
If you’re looking to purchase property, however, a commercial real estate (CRE) loan is the appropriate product. This is true whether you’re obtaining a commercial mortgage for the first time or using the equity from an existing property to invest in new properties.
Here are some of the key differences between C&I and CRE loans, as well as a deeper explanation of their purposes.
Commercial and industrial loans are made directly to businesses, rather than individuals. They may be secured by real estate but usually are not. For example, if your business needs a loan to purchase equipment, a C&I lender will want collateral. They may accept non-real estate collateral such as your weekly accounts receivable, or they may require your existing property as collateral.
There are many types of C&I loans. It is possible to obtain an unsecured loan if a lender determines a business has sufficient cash flow for repayment and the owner gives a personal guarantee. This is risky for the borrower, however, as the lender may require a blanket lien. This can put the business owner’s personal assets on the line if they default.
Lenders may grant asset-based financing, advancing a fixed percentage of the business’s receivables or inventory. They may offer lease financing for equipment purchases, loans that often include low monthly payments in exchange for higher interest rates, and the added benefit of requiring little or no residual value on the equipment at the end of the lease period.
U.S. Small Business Administration (SBA) loans are one type of C&I product, in which the federal government guarantees a portion of the loan to reduce lender risk. A business owner may pay an upfront fee as part of the guarantee, with the lender recouping as much as 75 percent to 85 percent of the total loan amount.
C&I loans are issued to a variety of businesses for commercial, industrial or professional purposes. Eligible businesses include manufacturers, retailers, hotels and motels, health care providers, and legal and accounting firms. The loans may be used for capital or operational expenses, or construction activity that doesn’t include real estate as collateral. The loan may be a lump sum with a fixed amortization schedule and interest rate, or it may be a line of credit that a business owner can access as needed.
Commercial real estate loans are strictly for real estate purchases, and are commonly used for investment purposes, where the owner rents the property to one or more tenants to generate income.
Lenders are usually more cautious in approving CRE loans because rental income is harder to predict and real estate is generally volatile, and carries a greater risk that a property will lose value during economic downturns. Sometimes, the characteristics of C&I and CRE lending overlap, such as when a business owner uses the equity from an existing property to invest in rental properties. A refinanced mortgage on the original property has C&I loan characteristics, but the rental-property investment has CRE loan characteristics.
Income-producing real estate — such as retail outlets, offices, hotels or apartment complexes — are the primary targets of CRE loans. The loan can pay for acquisition, development and construction costs. Compared to a residential mortgage loan, however, a commercial loan typically has a shorter repayment term (commonly five years or less), a lower loan-to-value ratio (65 to 80 percent) and isn’t fully amortizing, meaning a balloon payment is due at the end.
Additionally, a CRE lender will establish a debt-service coverage ratio (DSCR) that measures the total mortgage debt against the property’s annual net operating income (NOI). Lenders will want a DSCR higher than 1, which indicates positive cash flow. For example, if a property has an annual NOI of $200,000 and its annual mortgage debt is $140,000, then the DSCR is 1.43 ($200,000 divided by $140,000).