What Is a Credit Memo? What Banks Put in a Loan Write-Up

Who writes it and who reads it

In most commercial banks, the relationship manager (RM) brings in the deal, and a credit analyst or underwriter spreads the financials and drafts the memo. The memo is then reviewed by a credit officer and, depending on loan size and the bank’s approval authority structure, approved by an individual officer or a loan committee. Borrowers rarely see the memo, but they influence it through every document and explanation they provide.

What goes in a typical credit memo

Common credit memo sections
Section	What it covers
Request summary	Borrower, amount, loan type, purpose, rate, term, amortization, collateral, guarantors
Recommendation	Approve, approve with conditions, or decline, with key reasons
Borrower background	History, ownership, management, products, customers, industry
Sources of repayment	Primary (operating cash flow), secondary (collateral), tertiary (guarantors)
Financial analysis	Spread of 3 years plus interim: revenue, margins, EBITDA, DSCR, leverage, liquidity, working capital
Global cash flow	Combined business, affiliate and guarantor coverage
Collateral analysis	Description, value, advance rates, loan-to-value, lien position
Guarantor analysis	Personal financial statement, liquidity, credit, contingent liabilities
Risk rating	The bank’s internal grade for the loan
Strengths and weaknesses	Key risks and how each is mitigated
Policy exceptions	Any departures from bank policy and their justification
Covenants and conditions	Financial covenants, reporting requirements, conditions to close

The “five Cs” behind the memo

Most memos are organized, explicitly or not, around the classic five Cs of credit:

Character: management experience, reputation, credit history, and how forthcoming the borrower has been.
Capacity: cash flow to repay, measured by DSCR and trends.
Capital: equity in the business and owner investment; leverage.
Collateral: assets securing the loan.
Conditions: loan purpose, industry and economic conditions.

Strengths and weaknesses: the heart of the memo

Credit committees focus on the risk discussion. A strong memo names each weakness and pairs it with a mitigant. For example: “Revenue fell in one year due to the loss of a major customer; mitigant: the customer was replaced within twelve months, interim results show recovery, and customer concentration is now lower.” If you give the analyst the facts behind each weak spot, they can write the mitigant. If you do not, the weakness stands alone.

How borrowers can help the memo

Explain the numbers. Provide written explanations for one-time expenses, revenue dips, large distributions, and unusual balance sheet items.
Deliver complete documents. Gaps force assumptions, and assumptions in credit tend to be conservative. Use our document checklist.
Describe the business clearly. Customers, competitive position, management depth and succession.
Be specific about the use of funds and repayment.
Disclose issues early: lawsuits, liens, tax issues. Surprises late in underwriting can derail approval.

What happens after the memo

The approver may approve as presented, approve with changes (lower amount, extra collateral, tighter covenants), ask questions, or decline. Approved terms typically become the commitment letter and then the loan documents. Because each bank’s analyst and policy differ, the same borrower can receive different outcomes, which is why presenting a request to multiple banks can matter.

Credit memo vs. term sheet vs. commitment letter

How the documents differ
Document	Who sees it	Purpose
Term sheet / letter of interest	Borrower	Proposed terms, usually non-binding, before full approval
Credit memo	Bank internal	Analysis and recommendation to the approver
Commitment letter	Borrower	The bank’s approved terms and conditions
Loan documents	Borrower and bank	Binding note, security agreement and guarantees

Example: turning a weakness into a mitigated risk

Hypothetical: a contractor had one year of lower margins due to a fixed-price project with cost overruns. On its own, the analyst would report declining profitability. With a written explanation showing the project is complete, bidding procedures have been changed, and interim results have recovered, the memo can present the dip as a resolved, one-time event. The facts are the same; the clarity is different.

Key takeaways

The credit memo is the bank’s internal case for (or against) your loan.
It is built on the five Cs: character, capacity, capital, collateral and conditions.
Every weakness needs a documented mitigant.
Complete documents and clear explanations directly improve the memo.

How Credit Simplicity helps

During underwriting review, we analyze your business much as a bank credit analyst would and prepare a lender-ready package that anticipates the questions a credit memo must answer, including the strengths, the weaknesses and the mitigants. Banks can then evaluate the request faster. Get started in about two minutes.

Frequently asked questions

Can I see the bank's credit memo?

Usually not. It is an internal bank document. You can influence it by providing complete documents and clear explanations.

How long is a credit memo?

It varies with loan size and complexity, from a few pages for small loans to many pages for large or complex credits.

What is a risk rating?

A bank's internal grade for a loan's credit quality, used for approval, pricing and monitoring.

What are the sources of repayment in a credit memo?

Primary is usually operating cash flow; secondary is collateral; tertiary is personal guarantors.

Why would a loan be approved with conditions?

The approver may want extra protection, such as a lower amount, more collateral, additional guarantors, or tighter covenants, to offset identified risks.

Who approves the loan after the credit memo?

Depending on size and bank policy, an individual credit officer with sufficient approval authority or a loan committee.

Does a strong credit memo guarantee approval?

No. Approval depends on the bank's policy, risk appetite and the approver's judgment. A clear, complete file improves the odds and speed of a decision.

Why do two banks reach different decisions on the same borrower?

Banks differ in policy, industry appetite, how they adjust cash flow and their current portfolio concentrations, so the same facts can lead to different outcomes.

What is a policy exception?

A departure from the bank's written credit policy, such as a higher loan-to-value, that must be identified and justified in the memo.

This guide is general information, not legal, tax or credit advice. Requirements and terms vary by lender and change over time. Credit Simplicity is an advisor, not a lender; financing is subject to each bank’s approval.

What a credit memo is and what goes in it