A commercial loan is a debt instrument extended by a bank or financial institution to a business entity, typically used to fund operations, purchase equipment, finance receivables, or support growth initiatives. Unlike consumer loans, commercial loans are structured around the borrower's business cash flows, asset base, and creditworthiness as an enterprise.
The most common form is the commercial and industrial (C&I) loan, which encompasses revolving lines of credit, term loans, and equipment financing. C&I loans are typically secured by business assets — accounts receivable, inventory, equipment, or general business assets — though larger, higher-quality borrowers may borrow on an unsecured basis backed by cash flow covenants alone.
Underwriting a commercial loan requires analysis of the borrower's financial statements, cash flow generation, debt service capacity, management quality, industry dynamics, and collateral. Lenders focus heavily on the borrower's ability to repay from operating cash flows, not just asset liquidation. Key ratios include the debt service coverage ratio (DSCR), leverage (debt-to-EBITDA), and liquidity measures.
Commercial loans are priced as a spread over a reference rate — most commonly the Secured Overnight Financing Rate (SOFR) — plus fees that may include origination fees, commitment fees on undrawn revolvers, and annual facility fees. Loan agreements include affirmative and negative covenants, financial maintenance tests, and cross-default provisions that give lenders early warning of deteriorating credit quality.
The commercial lending market is divided broadly into large corporate banking (served by major money-center banks and capital markets), middle market lending (the $5M–$500M EBITDA segment), and small business lending. Each segment has distinct underwriting standards, documentation requirements, and risk characteristics, and each is served by a different competitive set of lenders.