Busy? Need a quick lesson (or refresher) on commercial and industrial loans? Here’s what you need to know about both
Commercial and industrial lending is on the rise throughout the U.S., and they’re not slowing down.
In fact, it’s increased by more than 35 percent since 2010, with businesses receiving more than $2 trillion in loans from commercial banks.
Are you interested in applying for commercial and industrial loans (also known a C&I loans)? If so, there are some important things you need to know and take into account.
Read on to learn everything business need to know regarding commercial and industrial loans.
What are commercial and industrial loans?
C&I loans are business loans. They’re usually given to small businesses in need of extra funding.
There are many reasons why a business might apply for a C&I loan, including the following:
- They’re experiencing cash flow problems and need additional working capital
- They need to purchase new equipment, machinery, or property to grow their business
- They need to hire a new supplier or additional employees to keep the company up and running
In most cases, C&I loans are short-term loans that require collateral. They come with flexible interest rates, too.
These interest rates are determined by the bank prime rate or London Interbank Offered Rate, which is a globally accepted benchmark for determining interest rates.
Pros and cons of commercial and industrial loans
There are both benefits and drawbacks that come with applying for C&I loans. Some of the pros include:
- They provide an easy way to gain capital without having to take on new investors
- They allow for faster growth and expansion
- They allow business owners to retain ownership of their companies
At the same time, though, there are also some drawbacks.
All debt must be paid off, and C&I loans are no exception. If you do not have a plan in place to pay back your debt, you could end up losing your business or the assets that you put up as collateral altogether.
Putting a substantial portion of your monthly profits to debt repayment also takes money away from other operations and can slow down the growth of your business. In some cases, interest rates can be quite high for C&I loans, too.
Applying for commercial and industrial loans
If you’ve decided that a C&I loan is a good approach for you, you’ll need to follow these guidelines when applying. Abiding by these guidelines will help you ensure your loan application gets approved:
Make Sure You Have Collateral
When you’re applying for a C&I loan, you almost always need to put up some kind of collateral.
If you’re planning to use your loan to purchase new equipment for your business, you can use that equipment as the collateral for your loan. If you default on your payments, the bank will seize that equipment to make up for the loss.
Consider a personal guarantee
If your business is a startup and you don’t have anything to offer as collateral, you may be able to use a personal guarantee instead.
A personal guarantee is a legally binding promise that says you will pay back the money personally if your business cannot meet its financial obligations. If you take this approach, you may need to pledge some of your personal assets as well.
Find a co-signer
You might also be able to qualify for a C&I loan if you have someone who can co-sign the loan. He or she will need to have some assets — either business-related or personal — that they can use as collateral.
Gather Essential Documents
Finally, make sure you have all the necessary documentation ready to go.
Often, when businesses have their loan applications denied, it’s because they didn’t have all the necessary paperwork. The following are some documents you’ll need when applying for a C&I loan:
- Your business plan
- Financial statements from the last few years
- Business tax returns from the last few years
You might also need to provide copies of your personal tax returns. This is especially likely if you’re hoping to use a personal guarantee instead of business assets as collateral.
Finding the right lender
In addition to being prepared with all the necessary documentation, the key to getting approved for a C&I loan is to make sure you’re working with the right lender.
Here are some tips that will help you choose the best lender to fund your business:
- Start local — banks that are located close to your business are often more likely to approve your loan application
- Match the size of your loan to the bank — if you need a large loan, work with a large bank, and vice versa
- Do research ahead of time and find the lenders in your area that offer the best rates
- Plan to submit your application to several lenders
This last tip is especially important. Don’t give up if your loan application is turned down by the first lender. If your business is a startup or doesn’t have a lot of assets, it may take a few tries to find someone who’s willing to approve your application.
Alternatives to commercial and industrial loans
If you can’t get approved for a C&I loan, that doesn’t mean you’re out of funding options. You just might have to get creative.
For example, instead of using a C&I loan, you could try applying for a commercial real estate loan to expand your business.
Applying for a line of credit is another good option and it can be secured or unsecured — meaning you won’t have to put down collateral in exchange for it.
Learn more about business loans today
You now know a lot more about commercial and industrial loans and how to apply for them.
With this information in mind, are you interested in using one to help fund your business? Would you like to learn about other business lending options before you make a decision?
If you want to learn about other lending options, or just learn more about managing your business’s money in general, we’ve got resources for you on our site.
Check out the Money section today for all the information you need on money management, loans, investment, and more.