What it means
The defining feature is purpose. If a loan buys a building, it is commercial real estate lending; if it funds the working capital that keeps the building busy, it is commercial and industrial lending.
That distinction drives how the bank underwrites, because repayment depends on trading performance rather than on the value of bricks and mortar. These loans come in a few standard shapes.
A revolving credit facility lets a business draw and repay repeatedly up to a limit, a term loan advances a fixed sum repaid over several years, and an asset-based line sizes the available amount against eligible receivables and inventory through a borrowing base calculation. Most growing companies end up with a revolver for seasonal swings and a term loan for equipment.
Pricing is normally floating: a reference rate such as a published overnight financing rate plus a spread reflecting credit quality. On a revolver the bank also charges an unused commitment fee on the undrawn portion, because it must hold capital against the promise to lend even when nothing is drawn.
That fee is small in percentage terms but easy to overlook when comparing offers. Covenants do most of the risk management work.
A facility will usually require the business to maintain a minimum fixed charge coverage ratio, keep leverage below an agreed multiple, deliver financial statements within a set number of days and avoid new secured debt without consent. Breaching one does not always trigger repayment, but it hands the bank the right to renegotiate.
Economists track aggregate commercial and industrial lending because it moves with business confidence. Rising balances usually indicate companies expanding inventory and hiring, while sharp contractions often precede or accompany a downturn as firms conserve cash and banks tighten standards.
For an individual company, the practical lesson is that credit availability can change for reasons that have nothing to do with its own performance.
In practice
Real-world examples.
Example
A frozen food producer needs to build stock ahead of a winter selling season. It draws $900,000 on its revolving facility in September, sells through November and December, and repays the balance in January, paying interest only for the months the money was outstanding.
Example
A staffing agency pays contractors weekly but invoices clients on 45-day terms. Its bank provides an asset-based line advancing 85% against approved receivables, so the agency can grow headcount without waiting for client payments to arrive.
Example
A commercial printer buys a $600,000 press using a five-year term loan secured on the equipment, with repayments matched to the additional contribution the press is expected to generate. The bank takes a security interest in the machine and requires annual audited accounts.
Formula
Calculation
Annual cost of a revolving facility = (Average drawn balance x All-in interest rate) + (Average undrawn amount x Unused commitment fee)
A manufacturer has a $2,000,000 revolving facility priced at a reference rate of 4.50% plus a spread of 2.50%, giving an all-in rate of 7.00%. It draws an average of $1,200,000 across the year and pays an unused commitment fee of 0.25%.
Interest = $1,200,000 x 7.00% = $84,000
Undrawn amount = $2,000,000 - $1,200,000 = $800,000
Unused fee = $800,000 x 0.25% = $2,000
Total annual cost = $84,000 + $2,000 = $86,000
The effective cost on money actually borrowed is $86,000 / $1,200,000 = 7.17%, slightly above the headline rate because the unused fee is spread across a smaller drawn balance.Case study
Seen in the real world.
Pinehill Fabrication is an invented metalworking company used for this illustrative case. It held a $2,000,000 revolver and treated it as spare capacity, drawing to the limit whenever cash felt tight and repaying whenever a large invoice cleared.
At the annual review the bank noticed that the facility had not fallen below $1,700,000 at any point in eighteen months. A revolver that never revolves is functioning as permanent debt, which the bank views differently because it is no longer self-liquidating from the working capital cycle. It asked Pinehill to term out $1,000,000 over four years and reduce the revolver to $1,000,000, raising the blended cost and adding a fixed repayment obligation.
The fictional lesson is that the structure of a facility carries expectations about how it will behave. Pinehill's underlying business was sound, but using short-term revolving credit to fund what was really a permanent increase in working capital left it renegotiating from a weaker position than it needed to.
Watch out
Common mistakes.
- Comparing facilities on the headline spread alone. Arrangement fees, unused commitment fees, minimum drawdown rules and covenant tightness can change the real cost far more than a quarter point of spread.
- Using a revolver to fund long-lived assets. Short-term facilities are reviewed annually and can be reduced, which leaves the business exposed if the asset it funded still has years of life left.
- Treating covenant reporting as an administrative chore. Late statements are themselves a breach in most agreements, and a pattern of late reporting damages credibility long before any financial ratio is missed.
Questions
People also ask.
How does a commercial and industrial loan differ from a commercial mortgage?
The industrial version funds operations and is repaid from trading cash flow, while a commercial mortgage funds property and is secured on the building's value.
What security does a bank usually take?
Most commonly a general security interest over business assets such as receivables, inventory and equipment, often supported by a personal guarantee from the owners of a smaller company.
What is a borrowing base?
It is a calculation that caps how much can be drawn based on eligible collateral, for example 85% of receivables under 90 days plus 50% of finished goods inventory, recalculated monthly.
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