A credit memo is the document a lender's underwriter writes to recommend a loan to the credit committee or approving officer. It summarizes the request, the borrower and its owners, the transaction, the historical and projected financial results, debt service coverage, collateral and guarantors, and then weighs the strengths against the risks and their mitigants. It proposes the structure, covenants and conditions, notes any exceptions to the lender's policy, and assigns a risk rating. It is internal to the lender. A borrower's package that supplies each section's answers in advance makes the memo faster and firmer to write.
- Written by
- The lender's underwriter or credit analyst
- Read by
- Credit committee or the officer with authority to approve
- Core test
- Can the business repay from cash flow, and what backs the loan if it cannot?
- The heart of it
- Strengths, risks and a mitigant for each risk
- Also contains
- Structure, covenants, conditions, policy exceptions, risk rating
- Borrower's role
- Supply the facts and explanations the memo needs before they are asked for
The lender's internal case for a loan
The relationship manager who meets the borrower rarely approves the loan. Approval sits with a credit officer or a committee, people who will never visit the business. The credit memo is how the deal reaches them. It is the underwriter's written argument for the loan, built from the borrower's documents and the lender's own analysis, and it is what the approvers read, question and sign.
The name causes one confusion worth clearing up. In accounting, a credit memo is also a document that reduces what a customer owes on an invoice. This page is about the lending document, sometimes called a credit approval memo, credit write-up or credit presentation.
Because the memo is internal, a borrower cannot read it. But its structure is standard enough across banks, SBA lenders and private credit funds that a borrower can know what it will need to say, and a well-prepared file can supply most of it.
The standard sections
| Section | What the underwriter writes | What the borrower's package can supply |
|---|---|---|
| Request summary | Amount, product, term, rate, purpose, collateral, guarantors | A clear financing request with sources and uses |
| Borrower and ownership | History, legal structure, owners and their stakes, affiliates | An organizational chart and ownership table, including every 20% owner |
| Management | Experience, depth, succession, key-person risk | Résumés and a description of who runs what below the owner |
| Business and industry | What the company does, customers, suppliers, competition | The business overview and customer concentration analysis from the lender CIM |
| Historical financial analysis | Revenue, margins, EBITDA and trends, reconciled to tax returns | Statements tied to returns, with differences explained |
| Earnings adjustments | Which add-backs the lender accepts and why | An EBITDA bridge with support for each item |
| Repayment capacity | Debt service coverage, historical and projected, business and global | A model with coverage by year and a downside case |
| Collateral analysis | Each asset, its value, the advance against it, the shortfall | Receivables and inventory reports, equipment list, real estate details |
| Guarantor analysis | Personal financial statements, other income and obligations, liquidity | Personal financial statements and personal tax returns for each guarantor |
| Strengths, risks and mitigants | The balance of the case | Risks named up front, with the mitigant for each |
| Structure, covenants and conditions | What the lender will require | A proposed structure the numbers support |
| Policy exceptions and rating | Where the loan departs from policy, and the risk grade | Facts that remove the need for an exception |
SBA lenders add program sections: eligibility of the business and the use of proceeds, the credit elsewhere test, equity injection and its source, the ownership and guarantee picture drawn from SBA Form 1919, and, in a change of ownership, the business valuation and seller's transition terms.
Three sources of repayment
Most credit memos organize the repayment analysis the same way. The primary source is the business's cash flow. The secondary source is the collateral: what the lender could recover by selling the assets. The tertiary source is the guarantors: the owners' personal assets and income. A loan is approved on the first; the other two decide how much loss the lender takes if the first fails.
For the primary source, the key measure is the debt service coverage ratio: cash flow available for debt service divided by the payments. SBA requires at least 1.15x, and 1.0x globally including the owners. From 1 October 2026 a change of ownership must show 1.25x on historical results. Conventional bank lenders commonly look for at least 1.25x. The memo will show the ratio for each historical year and each projected one, and will say what the business earns against what it must pay: for example, earnings available for debt service of 1,300 against payments of 1,000.
The global cash flow analysis then adds the owners' personal income and obligations, which is why the lender asks for personal tax returns and a personal financial statement from each guarantor. Every owner of 20% or more personally guarantees an SBA loan.
An underwriter who has to estimate a number will estimate it conservatively. Every figure the borrower supplies and supports is one the underwriter does not have to guess.
Strengths, risks and mitigants
The section approvers read most closely is the balance of the case. A memo that lists only strengths is not credible to a committee, and a risk without a mitigant can be enough to decline. Good underwriters pair each risk with the fact that limits it:
- Customer concentration, mitigated by a long relationship, a multi-year contract, or a history of the customer staying through downturns. See customer concentration in acquisitions.
- Dependence on the owner, mitigated by a general manager or key staff who stay, and in an acquisition by the seller's transition period and the buyer's own industry experience.
- Thin coverage in a down year, mitigated by a seller note on full standby, a longer amortization, or a smaller loan with more equity.
- Limited collateral, mitigated by strong, consistent cash flow and guarantors with real liquidity.
- A decline in earnings, mitigated by an explanation the numbers support: a lost line of business that has been replaced, or a one-time cost that will not recur.
Almost every one of those mitigants is a fact only the borrower knows. If the borrower does not say it, the underwriter cannot write it.
Structure, covenants and policy exceptions
The memo closes with what the lender will require if the loan is approved: amount, term, amortization, pricing, collateral, guarantees and covenants, plus conditions to closing. These become the basis for the commitment letter. The covenant levels are usually set with headroom below the projections the memo accepted, which is why weak or unsupported projections lead to tighter covenants.
Any departure from the lender's written credit policy is listed as an exception with its justification: leverage above the usual limit, a collateral shortfall, a newer business, an owner without industry experience. Exceptions are not refusals, but each one needs a reason approvers accept, and a memo with several is harder to approve. Often an exception disappears once the underwriter has the right fact, such as a real estate appraisal that closes the collateral gap.
SBA lenders with delegated authority under the Preferred Lender Program approve the loan themselves on their own memo. Other SBA lenders send their analysis to SBA for its decision.
Answering the memo before it is written
A borrower cannot write the lender's memo, but it can make sure every section has a documented answer waiting. That is the purpose of an underwriting memo in a lender package: an analysis written the way a lender's credit officer would write it, with the financial analysis, coverage, collateral, strengths, risks and mitigants, and the proposed structure. Transparent's package includes one, alongside the lender presentation, financing model and blind teaser, built in a day once a borrower's documents are in. See how we underwrite.
The practical effect is that the underwriter spends its time verifying rather than reconstructing, and the approvers see a case in which the hard questions have already been asked. A lender still makes its own judgment, and no package guarantees an approval. What it removes is the risk that a good business is declined because its strengths never reached the memo. For the most common reasons that happens, see why acquisition loans get declined.
Common questions
- Can I see the lender's credit memo?
- Generally not. It is an internal document and often contains the lender's risk rating and policy analysis. What a borrower sees is the result: a term sheet, commitment letter, or a list of questions that reveals what the memo needs.
- Who approves the loan after the memo is written?
- It depends on the loan's size and the lender's structure: a single credit officer for smaller loans, a committee for larger ones or those with policy exceptions. Under SBA's Preferred Lender Program the lender approves SBA loans itself; other SBA lenders submit them to SBA.
- What is a policy exception?
- A point where the proposed loan departs from the lender's written credit policy, such as leverage above its usual limit or a collateral shortfall. The memo must justify each one, and each one makes approval harder.
- Why does the lender want my personal financial statement if the business is borrowing?
- The guarantors are the third source of repayment. The memo analyzes their income, obligations and liquidity, and SBA requires every owner of 20% or more to guarantee the loan.
- What is the difference between a credit memo and an underwriting memo?
- A credit memo is the lender's own document. An underwriting memo in a borrower's lender package is written on the borrower's side in the same shape, so the lender's underwriter can verify the analysis rather than build it from scratch.