Difference Between C&I Loans and Commercial Real Estate Loans

Understanding the distinctions between Commercial & Industrial (C&I) loans and Commercial Real Estate (CRE) loans is essential for businesses seeking financing. These loans are offered by various financial institutions, including banks and credit unions. To make informed decisions, it’s important to understand the differences between banks and credit unions and how they might impact your financing options.

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. Providing a Certificate of Incumbency can further assure lenders of the legitimacy and authority of the individuals involved in the transaction.

· 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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