Commercial Loan Credit Memo: What to Include

A commercial loan credit memo is the written case an analyst builds to recommend approving, declining or structuring a loan. It pulls the borrower's financials, cash flow, collateral and risks into one document the credit committee reads before it decides. A complete memo covers the request and use of proceeds, the borrower and guarantors, a financial analysis with the debt service coverage and leverage ratios, a global cash flow view, collateral and loan-to-value, the assigned risk rating, the three to five largest risks with their mitigants, and the proposed terms and pricing. This guide lays out exactly what goes in each section, what reviewers and examiners look for, and how credit teams cut the slow part of building one.

What is a commercial loan credit memo?

A commercial loan credit memo, also called a credit approval memorandum (CAM) or loan write-up, is the document a credit analyst writes to present a loan request to the approving authority. It captures a complete, accurate snapshot of the borrower and the request, supports the initial credit decision, and becomes the baseline the bank measures against at every renewal and modification. The memo is both an analysis and an argument: it shows the numbers, names the risks, and makes a defensible recommendation the committee can sign off on.

What should a commercial loan credit memo include?

A complete commercial loan credit memo includes the loan request and use of proceeds, borrower and guarantor background, a financial analysis with the key coverage and leverage ratios, global cash flow, collateral and loan-to-value, the assigned risk rating, the main risks and their mitigants, and the proposed structure, terms and pricing. The exact template varies by bank, but the credit committee needs the same picture every time: who is borrowing, whether the cash flow repays the debt, what secures it, what could go wrong, and why the bank should still do the deal.

How do you write a commercial loan credit memo?

You write a commercial loan credit memo by gathering the borrower's documents, spreading the financials, building the cash flow and ratios, then translating the analysis into a clear narrative that leads with the recommendation. Start with the request and the use of proceeds so the reader knows what is being decided. Spread the tax returns and financial statements, rebuild cash flow from the bank statements, and compute debt service coverage, leverage and liquidity. Lay out the collateral and loan-to-value. Then write the story behind the numbers: the strengths, the three to five largest risks, and the mitigant for each. Close with the assigned risk rating and the proposed terms. Get to the point quickly and use headings, short paragraphs and tables so a committee member finds the answer fast.

What financial ratios go in a credit memo?

The financial section of a commercial credit memo centers on a few ratios that show whether the borrower can service the debt and how leveraged it already is. Debt service coverage is the headline number; leverage, liquidity and the global cash flow view round it out. Each ratio should trace back to a documented figure on the spread, and most banks compare it to a benchmark in their credit policy.

For the mechanics behind the headline number, see our guide to the debt service coverage ratio, and for the combined business-plus-guarantor figure, global cash flow analysis. The ratios only mean something once the financials are spread consistently, which is the job financial spreading software handles before the memo is written.

How do you write the risk section of a credit memo?

You write the risk section by naming the three to five largest risks to repayment, then pairing each with a concrete mitigant. Reviewers and examiners look for honesty here, not a sales pitch: a memo that lists no risks reads as incomplete. Typical risks are customer or supplier concentration, thin liquidity, an aggressive leverage position, an industry in decline, or a guarantor whose personal cash flow is already stretched. For each one, state what offsets it, a strong collateral cushion, a long deposit history with the bank, a personal guarantee, a covenant that triggers early. The goal is to show the committee the bank understands the downside and has structured around it.

What documents do you need to build a credit memo?

Building a commercial credit memo takes the borrower's financial statements, two to three years of business and personal tax returns, recent bank statements, a current debt schedule, and the collateral documentation. The financial statements and tax returns drive the spread and the cash flow; the bank statements verify deposits and reveal the real average balance, NSF activity and any existing advances; the debt schedule confirms every obligation feeding debt service; and the collateral file supports the loan-to-value. Gathering and keying all of this is where the time goes before any analysis even starts.

For what a lender reads off the schedule of debt, see our guide to the business debt schedule, and for pulling clean cash flow off the statements, add-backs in business cash flow.

How long does it take to write a credit memo?

A commercial credit memo usually takes several hours to a full day, and most of that is data work, not judgment. Spreading the tax returns and financial statements and rebuilding cash flow from the bank statements can run 30 to 60 minutes per borrower before the analyst forms an opinion, and a guarantor or related entity adds more. The narrative and risk write-up come after, once the numbers are in. The slow, error-prone part is the keying; the analysis and the recommendation are where an experienced analyst actually earns the time.

What covenants go in a credit memo?

The credit memo does not just describe the borrower, it proposes the terms the loan will live under, and the covenant package is part of that recommendation. A typical write-up names the financial covenants the credit will carry, the level each one is set at, and the testing frequency: a minimum debt service coverage ratio, commonly 1.25x, tested quarterly; a maximum leverage ratio expressed as funded debt to EBITDA; sometimes a minimum tangible net worth or current ratio. It also names the reporting covenants, meaning which statements, tax returns and compliance certificates the borrower owes and by when.

Two things make this section worth writing carefully. First, the covenant levels should follow from the spread you just built rather than from a template. If the borrower underwrites at a 1.42x coverage ratio, a 1.25x covenant leaves real headroom; if it underwrites at 1.28x, the same covenant will trip on an ordinary bad quarter and generate waiver work for years. Set the level against the borrower's actual numbers and their volatility. Second, whatever you write here becomes recurring work for the portfolio manager, because each covenant has to be recalculated every period for the life of the loan. A memo that specifies five quarterly covenants on a small credit has committed the bank to twenty testing events a year on that one file. See how lenders monitor loan covenant compliance for what that cycle involves, and loan covenant monitoring software for testing those covenants against the borrower's financials instead of the certificate they self-certify.

Can a credit memo be automated?

The data and spreading behind a credit memo can be automated; the recommendation stays a credit judgment. Software reads the tax returns, financial statements and bank statements, extracts every figure, and computes the debt service coverage, leverage and global cash flow the memo turns on, with each value traceable to its source so a reviewer verifies instead of re-keys. Credit analysis software removes the transcription bottleneck and the transposed-figure risk, so the analyst spends the time on the risk write-up and the recommendation rather than building the spread by hand. The same extracted output feeds the broader loan underwriting software workflow and the credit risk rating the memo carries. Tools like Aloan and Abrigo now market AI memo drafting on top of that analysis, but the underlying spread still has to be right, which is where automated extraction earns its place.

Once the memo is approved, the file still has to come together. Many teams export the borrower's statements to a clean workpaper with a bank statement to Excel converter, confirm the rent and lease obligations cited in the write-up against the actual contracts with lease abstraction software, and get the approved facility executed through an online document e-signing tool. Each step sits downstream of the credit decision, so the memo stays the focus and the rest is mechanical.

Frequently asked questions

What is the difference between a credit memo and a loan agreement?

A credit memo is the internal analysis that recommends and supports the credit decision; the loan agreement is the external contract the borrower signs once the deal is approved. The memo argues why the bank should lend and on what terms. The agreement is the legal document that binds those terms. The memo never leaves the bank; the agreement is executed with the borrower.

Who approves a commercial loan credit memo?

The approving authority depends on the size and risk of the loan: smaller credits may be approved by a single credit officer under delegated authority, while larger or weaker exposures go to a loan committee. The analyst writes the memo and makes the recommendation, but the sign-off lives in the bank's approval chain, and independent loan review and examiners later test whether the analysis and the assigned rating hold up.

Is a credit memo required for an SBA loan?

Yes. SBA lenders prepare a credit memorandum documenting the analysis that supports a 7(a) or 504 approval, including cash flow, the debt service coverage, the collateral position and the credit decision rationale. The SBA expects the file to show a prudent, well-documented credit analysis, and a thin or missing memo is a common finding in an SBA lender review. For the underwriting standards behind it, see our SBA loan underwriting guidelines.