What should a business owner know about C&I loans?

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Ask a Lender
August 14, 2017 | Updated September 26, 2017


Key Points

Basics of commercial and industrial (C&I) lending

  • For businesses and corporations, not individuals
  • Used for working capital, development opportunities and equipment purchases
  • Not used for real estate purchases
  • Community banks with less than $10 billion in assets commonly issue
  • Borrowers assessed on credit history, cash flow, collateral and documentation

Business owners may hear the term “C&I loan” and scratch their heads, unsure of the meaning. Rightfully so, as the definition and most practical uses of a commercial and industrial loan can be somewhat murky.

C&I loans have steadily grown as a portion of all business-investment products, from about 60 percent in 2008 to more than 70 percent in the first quarter of 2017, the Milken Institute and Federal Reserve reported. Data also shows that banks are shifting C&I lending practices in favor of larger borrowers. Loans for less than $1 million comprised 17.4 percent of investment financing in first quarter 2010, but declined to 12.5 percent in first quarter 2017. During the same time span, investment loans of more than $1 million increased their share from 44 percent to 56.5 percent.

It’s arguable that C&I loans are strong indicators of the economy as a whole, showing the real needs and expenses of businesses, and whether borrowing rates are going up or down as a result. Here’s what to look for if you’re considering this type of loan for your business.

Characteristics and purposes

C&I loans are granted to businesses or corporations, rather than individuals. Small businesses, such as sole proprietorships and partnerships, are the most common recipients. C&I loans differ from commercial real estate (CRE) loans because they are not generally secured by property or used to purchase property. Instead, they’re best used for working capital or large capital expenses, such as equipment.

A business owner may consider a C&I loan when they’re looking for a short-term solution, such as meeting seasonal demands or capitalizing on a development opportunity. They may have valuable collateral such as accounts receivable or inventory.

C&I loans are issued to all types of businesses, including manufacturers, mining and gas companies, construction firms, hotels and resorts, for-profit nursing homes and hospitals, as well as accounting, legal and medical providers. They’re often used for capital project expenses, operational expenses such as hiring more employees, or construction that is not secured by real estate.

These types of loans are difficult for startup businesses to obtain because C&I lenders usually require proof of current and past cash flow. And although they aren’t used for real estate purchases, a business may use its own property as collateral. Lenders will look to ensure the value of any collateral is maintained throughout the life of the loan, to minimize risk in case of default.

The loan itself can be a line of credit with interest-only and balloon payments, or a lump sum in which the principal and interest are repaid in equal installments. Loans secured through the U.S. Small Business Administration are common path to a C&I loan. The average interest rate for C&I loans across all commercial banks was 2.53 percent as of second-quarter 2017, the Federal Reserve System reported. And the average size of a C&I loan across all small domestic banks, as defined by the Fed, was $123,000 as of second-quarter 2017.

Submit a strong application

Community banks, generally defined as those with less than $10 billion in assets, often have an advantage over larger banks when it comes to C&I lending because they generally have more relationships with small-business owners. These institutions may be a good place to start when looking for a lender. Several factors can influence whether a loan application is approved or rejected:

  • Credit history. Obtain and review your commercial credit report. Conventional lenders may want several positive reports before considering a business creditworthy. If you have little to no credit, look to establish more.
  • Cash flow. Community banks often want to see a cash-flow ratio in which available capital exceeds debt by at least 15 percent. To improve cash flow, look to pay off or delay debt by refinancing into lower payments. Be more aggressive in collecting receivables. Encourage cash sales through discounts and lower your reliance on credit. Process cash and checks in a timely manner.
  • Collateral. Particularly with a line of credit, short-term assets like accounts receivable and inventory are acceptable as collateral. Lenders will want a first-position lien, meaning there are no other claims to your property. You may get a loan-to-value (LTV) ratio of 60 to 80 percent for inventory, although manufacturers that carry a lot of unfinished materials and product components may only get 30 percent. Receivables vary widely, from 30 to 75 percent LTV, and lenders may not finance anything older than 90 days, viewing these accounts as too risky.
  • Documentation. Lenders may require two to three years of income statements, balance sheets, and personal and business tax returns, as well as projected revenues for the next few years. If you need working capital, provide information about your debts, especially anything at least 30 days overdue. With equipment, note whether it can be purchased and installed immediately, and how much time or money your company may lose during the installation.

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