In this series of guides (“Lending in the Time of COVID-19”), we explore your loan options, despite the COVID-19 pandemic. Creative and flexible loan solutions are still available, and we continue to monitor the situation and keep our finger on the pulse as to who is lending. To access all the volumes in this series, go to our “Series” page here.
In our last installment, we discussed how owners of commercial real estate can tap into the equity of their property through cash-out refinancing.
However, what if your business does not own brick-and-mortar commercial real estate? Or what if your business does own CRE but a cash-out refinance is not possible? As discussed in our previous article, lenders these days are unwilling to lend on commercial properties that are not cash flowing. And, for those lenders that do have a higher risk appetite, their cash-out refinance terms may have been difficult for you to swallow (e.g., high interest rates and strict reserve requirements).
Besides a traditional real estate mortgage loan, is there an alternative loan that will allow your business to pledge non-real-estate assets as collateral in order to obtain much-needed funds?
Yes, you can look for a commercial & industrial (C&I) loan.
These loans are far more prevalent than you may have thought. According to the Federal Reserve, as of August 14, 2020, C&I loans from all commercial banks in the U.S. accounted for $2.82 billion dollars.
Here, we break down the basics of C&I loans and how you can take advantage of them to get the funds you need to run your business during these trying times.
What is a commercial & industrial (C&I) loan?
A C&I loan is named as such because it is made to a corporate entity for commercial, industrial, and professional purposes, as opposed to an individual for personal use.
The key trait of this loan type is that it allows your company to pledge other assets as collateral — besides real estate — such as equipment and accounts receivable.
C&I loans (also known as furniture, fixtures & equipment (FF&E) loans; leasing loans; merchant cash advances; purchase order (PO) financing; revenue-based financing; small business loans; specialty lending; supply chain financing; and working capital loans) are typically short-term, usually around 6 to 36 months.
C&I lenders do not have the benefit of placing a lien on a solid brick-and-mortar building. Instead, the lender’s security is much more ephemeral. Therefore, the lender will closely monitor your company’s cash flows and operations, including tracking your earnings before interest, taxes, depreciation, and amortization (EBITDA), aging receivables, and inventory turnover.
What collateral can your company pledge for a C&I loan?
The list of eligible assets can be long or short, depending on the lender’s risk appetite:
- Accounts receivable
- Future credit card receipts
What types of businesses typically benefit from C&I lending?
These loans are ideal for small businesses that are unable to raise investor funding or otherwise raise funds, such as by issuing stocks or bonds.
Small and medium businesses (SMB) with $5 to 10 million in annual revenue, as well as small and medium enterprises (SME) with $10 million to $1 billion in annual revenue can also benefit from C&I loans.
The spectrum of industries that C&I lending caters to is broad and includes:
- Commercial vehicles
- Franchise & quick-service-restaurants (QSR)
- Funeral Home & Cemetery
- Gas, convenience store (C-store) & car wash
- Manufacturers & wholesalers
- Merchant finance
- Mining, oil & gas
- Professional firms
- Senior Care
- Software & technology
Can the C&I loan proceeds be used for any purpose?
The loan proceeds can be used for anything, as long as it is directly connected to a business. This flexibility is important, perhaps now more than ever, with the toll that the COVID-19 pandemic has taken on nearly every industry.
Some common purposes for C&I loan proceeds include:
- Capital expenses and operations (e.g., hiring employees and contractors, filling seasonal revenue gaps, purchasing equipment or new technology)
- Leveraged buyouts
- Partner buyouts
- Add-on acquisitions
- Growth capital
- Emergency issues such as the impact of COVID-19 and FDA recalls
What are the different types of C&I loans?
These types of specialty loans can take various individual or hybrid forms such as:
- Term loans
- Asset-based loans
- Leasing and equipment financing
- U.S. Small Business Administration (SBA-backed) loans
- Lines of credit
- Cash advances
Necessity is the mother of invention. In trying times like these, you may need to look beyond traditional mortgage loans secured by commercial real estate. More accurately, you may need to look within the four walls of your business, and see what inventory or equipment can be pledged. Or you can look at your books, and see what receivables can be pledged.
It will just take creativity and patience to find the right C&I lending solution that will allow your business to continue operating and get through the pandemic.
Please contact us at 321-239-2781 or firstname.lastname@example.org or by clicking here to learn more about how your business can benefit from a C&I loan.
Continue exploring our “Lending in the Time of COVID-19” series: PREVIOUS: “S.O.S.! I need help with the mortgage loan on my commercial real estate!” (Volume 5) To access all the volumes in this series, go to our “Series” page here.