Difference Between C&I Loans and Commercial Real Estate Loans

Here’s a straightforward breakdown of the two most common types of commercial loans: Commercial & Industrial (“C&I”) loans and Commercial Real Estate (“CRE”) loans.

Here’s a breakdown of what sets them apart:

Purpose of the Loan

C&I Loan:

· Generally used for financing working capital needs, purchasing equipment, or expanding a business.

· Not tied to a specific piece of real estate, but rather the specific operational needs of a given business.

Commercial Real Estate Loan:

· Intended to facilitate a future owner’s purchasing or refinancing a specific commercial property.

· Typically used in acquiring office buildings, warehouses, retail spaces, and other commercial properties.

Collateral

C&I Loan:

· While collateral may be nonexistent in the C&I context, it can also be diverse and, where necessary, might include a range of assets from specific assets acquired based on the loan to general business assets such as machinery, inventory, receivables, and other tangible assets.

· The lender may acquire a specific “purchase money security interest” on acquired assets or seek a more general, blanket lien on all assets of the business. If a borrower defaults, the lender can seize the assets covered by the lien.

Commercial Real Estate Loan:

· Collateral is typically the real estate being financed. If the borrower defaults, the lender can seize the property that is typically covered by a strongly worded, first-priority mortgage lien.

· The value of the real estate – typically the subject of a market appraisal - often dictates the amount of the loan.

Loan Tenure and Terms

C&I Loan:

· Will often have a shorter term than CRE loans, which might range from a few months to a few years.

· May have a floating interest rate that varies based on market conditions.

Commercial Real Estate Loan:

· Will often have demonstrably longer terms than C&I loans, typically 10 years or more.

· May offer a fixed interest rate, providing stability in repayment amounts.

Repayment Structure

C&I Loan:

· Depending on the purpose, loans under the C&I umbrella can have structures varying based on

various factors including industry and loan purpose including term loans, lines of credit, or equipment financing agreements.

· Payment terms may be structured to align with predictable business cash flow models, such as for seasonal payments or contractual milestones.

Commercial Real Estate Loan:

· Typically structured with regular monthly payments that include both principal and interest that is amortized based upon some portion or all of the term ensuring predictable payment amounts.

· Some loans may have a balloon payment at the end where the remaining balance is due.

Approval Considerations

C&I Loan:

· Lenders evaluate a loan’s purpose and associated risks along with the company’s operational history, cash flow, creditworthiness, and overall financial health.

· The business’s ability to generate revenue and profits plays a critical role in approval.

Commercial Real Estate Loan:

· Lenders focus on the value of the property, its potential rental income, location, and the borrower’s creditworthiness.

· An appraisal – market-based and independent – will often be required to assess the property’s value as a precondition.

Takeaway:

In conclusion, while both C&I loans and CRE loans can provide businesses with their capital requirements, their purposes, terms, and approval processes differ significantly. Generally speaking, C&I loans are generally used for a business’s operating needs (whether those needs are generalized or specific in nature), while CRE loans are focused on acquiring a specific piece of real estate.

Before deciding on a loan type, consider consulting with a financial advisor or lender to understand which option aligns best with your business goals and needs.

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