A commercial and industrial loan, usually shortened to C&I loan, is bank financing extended to a business to fund its operations rather than to buy real estate. The money pays for working capital, equipment, inventory, expansion, or acquisitions, and the bank looks to the company’s cash flow and movable assets, not a building, to get repaid. C&I loans are one of the largest categories of business lending in the country, with roughly $2.79 trillion outstanding at U.S. commercial banks in early 2026.1Federal Reserve Bank of St. Louis. Commercial and Industrial Loans, All Commercial Banks (BUSLOANS)
How C&I Loans Differ From Commercial Real Estate Loans
The label matters because C&I loans and commercial real estate (CRE) loans are often confused, and they behave very differently. A CRE loan is secured by a specific property, and the lender’s repayment analysis centers on that property’s rental income and market value. A C&I loan is secured by the borrower’s operating assets and repaid from the business’s earnings. The lender cares whether your company itself produces enough cash to service the debt. That single difference drives the collateral setup, the covenants, the underwriting focus, and the day-to-day monitoring that follows.
The Two Structures: Term Loans and Revolving Lines
C&I facilities come in two basic shapes, and picking the wrong one for the job costs money.
Term Loans
A term loan delivers a lump sum upfront for a defined purpose, such as buying a specific piece of machinery or funding a multi-year buildout. You repay on a fixed amortization schedule, with regular principal and interest over a set period. Maturities usually run one to seven years and are often matched to the useful life of the asset being financed. An equipment loan for a machine expected to last five years typically carries a five-year term.
Revolving Lines of Credit
A revolving line, or “revolver,” works more like a credit card for the business. The bank commits a maximum limit, and you draw, repay, and draw again as cash needs shift. Interest accrues only on the amount actually outstanding, which makes revolvers well suited to working capital. If your cash flow swings with the season, a revolver lets you borrow $2 million during a slow month and pay it back when receivables come in, without carrying interest on the full committed amount. Most revolvers renew annually, though stronger borrowers can negotiate multi-year commitments.
How the Rate Is Built
C&I loan rates are almost always variable. The lender ties the rate to a benchmark and adds a fixed margin, called the “spread,” on top. The two most common benchmarks are the Secured Overnight Financing Rate (SOFR), an overnight borrowing rate backed by Treasury securities, and the bank prime rate.2FEDERAL RESERVE BANK of NEW YORK. Secured Overnight Financing Rate Data3Federal Reserve Board. H.15 – Selected Interest Rates (Daily) The spread reflects your credit risk and the competitive market. Mid-market borrowers commonly see spreads of 150 to 350 basis points (1.5% to 3.5%) over SOFR, with tighter pricing available to companies that bring a strong banking relationship. Because the rate floats, your debt service costs move with the benchmark, and that risk sits with the borrower. Some companies enter interest rate swaps to lock in a fixed rate, at the cost of added complexity.
What Secures the Loan
C&I collateral is fundamentally unlike the fixed property that secures a mortgage. Instead of a building sitting in one place, the bank takes a security interest in your operating assets, which shift daily as you buy inventory, ship product, and collect on invoices. Lenders call this “floating collateral,” and tracking it is its own discipline.
Accounts Receivable
Receivables (A/R) are the most common collateral for revolving lines. The bank won’t lend against the full face value because some invoices will go unpaid or slow-pay. Instead, it applies an “advance rate,” typically 70% to 90% of eligible A/R. Eligibility rules exclude invoices past a certain age (usually over 90 days), heavy concentrations with a single customer, and receivables where the debtor has its own credit problems.
Inventory
Inventory can also collateralize the loan, but banks are more cautious because liquidating goods is harder than collecting cash from customers. Advance rates run 40% to 60%, higher for commodity finished goods with a ready secondary market and lower (sometimes zero) for customized or perishable stock.
Equipment
Machinery and equipment usually secure term loans, especially when the loan finances the equipment itself. The lender bases the advance on the orderly liquidation value set by an appraiser, which sits well below replacement cost. Expect to put equity into any equipment purchase.
The Borrowing Base
In asset-based lending, your available credit isn’t a fixed number. It’s recalculated daily or weekly through a “borrowing base” formula that adds up eligible receivables and inventory, applies the advance rates, and produces the amount you can actually draw at that moment. You submit borrowing base certificates on a regular schedule, and the bank verifies them through periodic field audits.4Comptroller of the Currency. Accounts Receivable and Inventory Financing If receivables drop or inventory ages out, borrowing capacity shrinks in real time. You may have a $10 million committed line but only $6 million of availability against the current base. That gap is where most borrower frustration lives.
Perfecting the Lien
Because the collateral moves, the bank needs a legal mechanism to establish priority against other creditors. It “perfects” its security interest by filing a UCC-1 financing statement with the appropriate secretary of state.5Legal Information Institute (LII) / Cornell Law School. UCC Financing Statement These filings often cover “all assets” of the company, so signing on to a C&I loan with a blanket lien effectively pledges everything the business owns. That has real consequences if you later try to bring in another lender or sell a division.
Personal Guarantees
If you own a privately held business, expect the bank to ask you to personally guarantee the loan. This is standard practice in C&I lending for small and mid-size companies. A personal guarantee means that if the business can’t repay, the lender can pursue your personal assets, including bank accounts, investments, and in some cases your home.6NCUA Examiner’s Guide. Personal Guarantees
Guarantees come in two forms. An unlimited guarantee makes you liable for the full amount, including principal, accrued interest, and legal fees. A limited guarantee caps your exposure at a specific dollar amount or a percentage of the outstanding balance. When several owners are involved, limited guarantees are more common, with each owner responsible for a proportional share.
Lenders will sometimes waive the guarantee, but the bar is high: strong debt service coverage, a conservative balance sheet, positive earnings trends, and readily marketable collateral.6NCUA Examiner’s Guide. Personal Guarantees Startups and companies going through a rough stretch won’t get a waiver, and even established borrowers often can’t, because many lenders view the guarantee as a signal of management’s commitment regardless of the numbers.
What Lenders Look At Before Approving
C&I underwriting focuses on whether your business generates enough cash to comfortably service the debt. The bank is betting on your operating performance, so the analysis goes deep into your financials and your industry.
The debt service coverage ratio (DSCR) is the single most important number. It divides net operating income by total debt payments. A DSCR of 1.0x means you’re producing just enough cash to cover the debt with nothing left over. Most lenders require at least 1.25x, and stronger requirements of 1.50x or above show up in riskier industries or for weaker borrowers.
Leverage matters too, usually measured as total debt divided by EBITDA (earnings before interest, taxes, depreciation, and amortization). Lenders generally want to see this below 3.0x to 4.0x, though the acceptable range shifts by industry. A capital-light services firm faces a tighter standard than a manufacturer carrying heavy depreciation.
Beyond the ratios, lenders evaluate the management team’s experience through downturns, their record of hitting projections, and whether the company can survive the loss of a key person. Industry outlook also feeds into the decision: customer concentration, supply chain risk, regulatory trends, and where the borrower sits in the economic cycle. A construction or energy borrower faces more conservative terms than one in stable healthcare services.
Documentation typically includes two years of business tax returns with schedules, six months of bank statements, current profit-and-loss statements, an up-to-date balance sheet, and financial projections. Audited financials rather than internally prepared ones improve credibility and can produce better pricing.
Financial Covenants and What a Breach Triggers
Every C&I loan agreement carries financial covenants meant to warn the bank early if the business is weakening. Common covenants require you to maintain a minimum DSCR, stay under a maximum leverage ratio, keep working capital above a floor, or hold capital expenditures within budget. Negative covenants often restrict paying dividends, taking on more debt, or making acquisitions without lender consent.
Breaking a covenant is a technical default, even if you’ve never missed a payment. Many borrowers don’t fully understand this until it happens. A technical default gives the bank the right to accelerate the loan, making the full outstanding balance due immediately. In practice, lenders don’t always call the loan. The more common outcome is a forced renegotiation in which the bank tightens terms, raises the spread, demands more collateral, or adds new restrictions. Either way, all the leverage moves to the lender’s side of the table.
Fees and Costs Beyond Interest
The rate isn’t the only expense on a C&I loan. Several fees stack on top, and most are negotiable if you know to raise them.
- Origination fees, typically 0.5% to 1.0% of the loan amount, paid at closing. On a $5 million facility, that’s $25,000 to $50,000 before you’ve drawn a dollar.
- Unused line fees on revolvers, charged on the committed but undrawn portion, usually 0.15% to 0.50% annually. A $10 million revolver used at $4 million on average still generates this fee on the other $6 million.
- Prepayment penalties on some term loans, structured as 1% to 3% of the remaining balance or a flat fee. Revolving lines typically have none because flexible draw-and-repay is the point.
- Legal and appraisal costs, generally paid by the borrower. On a mid-market deal, legal fees alone can run $10,000 to $50,000.
- UCC filing fees, from $10 to over $100 depending on the state and method.
Interest paid on a C&I loan is deductible as an ordinary business expense, which is one reason debt financing is attractive relative to equity.7Office of the Law Revision Counsel. 26 US Code 162 – Trade or Business Expenses The deduction has limits for larger businesses under Section 163(j), so confirm your position with a tax advisor before assuming full deductibility.
SBA 7(a) Loans as a C&I Option
Smaller businesses that can’t get favorable conventional terms should look at the SBA 7(a) program. The SBA doesn’t lend directly. It guarantees part of a loan made by a participating bank, which lowers the lender’s risk and widens access to approval. The maximum 7(a) loan is $5 million, with the SBA guaranteeing up to 85% of loans of $150,000 or less and up to 75% above that threshold.8U.S. Small Business Administration. 7(a) Loans
Eligible uses include working capital, equipment, inventory, debt refinancing, and business acquisitions, which covers most of the same territory as a conventional C&I loan. The tradeoff is more paperwork, longer processing, SBA guarantee fees, and, on 7(a) loans with terms of 15 years or more, common prepayment charges. For borrowers who would otherwise face high rates or outright denial, the guarantee can be what makes the deal happen.