# Bank Credit Analysis: Writing the Credit Memo

- Author: TrueBankFlow (https://truebankflow.com)
- Published: 2026-10-17
- Category: Business loan and MCA underwriting
- Canonical: https://truebankflow.com/blog/bank-credit-analysis-credit-memo

> How bank credit analysis turns statements, tax returns and collateral into a credit memo: the sections, the risk rating and how analysts present a deal.
Bank credit analysis is the work an analyst does to decide whether a business loan should be made, and the credit memo is where that work is written down. The memo pulls tax returns, financial statements, bank statements and collateral values into one argument, ending in a risk rating and a recommendation that a loan committee can approve or decline.

## What does a credit memo from bank credit analysis contain?

A credit memo from bank credit analysis contains a summary of the request, background on the borrower and its industry, an analysis of repayment capacity, a review of collateral and guarantors, the proposed terms and covenants, the risks with their mitigants, and a risk rating. Banks use fixed templates so committees find each fact in one place.

Templates differ by bank and by loan size, but the outline below is typical. The example content is for a fictional machine shop asking for a $400,000 term loan to buy a CNC machine.

| Memo section | Question it answers | Example content |
| --- | --- | --- |
| Request summary | What is being asked, by whom, for what? | $400,000, 7 year term, to buy one CNC machine; borrower is Example Precision LLC |
| Recommendation | What does the analyst propose? | Approve, subject to a first lien on the machine and an owner guarantee |
| Borrower background | Who is the business and how long has it operated? | Founded 2014, two owners, 18 employees, aerospace and medical parts |
| Industry and market | What outside forces affect repayment? | Customer concentration in two aerospace buyers; long order backlog |
| Financial analysis | Can the business repay from operations? | Three years of returns, interim statements, 12 months of bank statements |
| Repayment sources | What repays the loan first, second and third? | Operating cash flow, then the machine, then the guarantors |
| Collateral | What is the security worth? | Machine appraised at $430,000 new; liquidation value much lower |
| Guarantors | Who stands behind the loan? | Both owners, with personal financial statements and credit reports |
| Terms and covenants | What conditions protect the bank? | Annual financial statements, minimum coverage tested yearly |
| Risks and mitigants | What could go wrong and what offsets it? | Customer concentration, offset by multi-year contracts |
| Risk rating | Where does the loan sit on the bank's scale? | A pass grade on the bank's internal scale |

The memo is an argument, not a data dump. Each section should say what it found and whether that helps or hurts the case. A committee reading 40 pages wants the judgment in the first page and the support behind it.

## Borrower and industry background in the credit memo

The borrower and industry background in a credit memo tells the committee who it is lending to before the numbers start. It covers ownership, history, management experience, what the business sells, who buys it, and the outside conditions that could help or hurt repayment over the life of the loan.

Committees ask about people first. The background section should name each owner with a stake of meaningful size, their roles and how long they have run this kind of business. A strong set of financials from a company whose founder just retired is a different risk from the same numbers under a team that has run the shop for a decade.

The business description should be specific. "Manufacturing" tells the reader nothing. "Machines titanium and stainless parts for two aircraft component suppliers, under purchase orders running 6 to 18 months" tells the committee where revenue comes from and how fragile it is.

The industry part stays short and tied to this borrower. A paragraph on how demand, input costs or regulation could change the borrower's revenue is more useful than a page of national statistics. When the analyst cites an outside figure, it needs a named source in the file.

Customer concentration belongs here as well. If one buyer accounts for a large share of sales, the memo should say so plainly and return to it under risks.

## Repayment capacity and cash flow in the credit memo

Repayment capacity in a credit memo is the analyst's estimate of how much cash the business produces each year that can go to debt payments, compared with the payments it will owe. The usual measure is debt service coverage: cash available for debt service divided by total annual principal and interest, including the new loan.

The cash figure is built from the tax returns or financial statements, starting with net income and adding back interest, depreciation, amortization and one-time costs the analyst can document. The details of that spreading are covered in [commercial loan underwriting](/blog/commercial-loan-underwriting), including global cash flow for owners who guarantee the debt.

Bank statements test whether that figure is real. The analyst compares:

- **Annual revenue on the return** with total revenue deposits over the same twelve months, after removing transfers and loan proceeds.
- **The debt schedule** with recurring lender debits. A monthly payment with no line on the schedule is undisclosed debt.
- **Year-end cash on the balance sheet** with the statement balance on the same date.
- **Recent months** with the last full year, to see whether the business is on the same path.

A short paragraph on that reconciliation earns its place in the memo. "Revenue deposits for the trailing twelve months were within 3% of reported sales" gives a committee more confidence than any coverage ratio alone.

Reconciling a year of statements by hand takes time. [TrueBankFlow](/) totals deposits by month, labels transfers between the accounts you upload, sorts loan payments into their own category and exports the figures in a report, with each total traceable to its statement lines, so the analyst can cite them in the memo. The coverage calculation and the recommendation stay with the analyst.

## Collateral, guarantors and loan covenants in a credit memo

Collateral, guarantors and loan covenants are the credit memo's secondary protection. Collateral is what the bank can sell if cash flow fails. Guarantors are people or companies who promise to pay. Covenants are conditions in the loan agreement that let the bank act early when the borrower weakens.

### Collateral

The memo should give each asset a value, the source of that value and a discount for selling it under pressure. Equipment loses value quickly once it is used, and specialized machines may have few buyers. How lenders value and monitor equipment is the subject of [equipment financing underwriting](/blog/equipment-financing-underwriting). Receivables are another common security, with their own tests on the customers who owe them, set out in [invoice factoring underwriting](/blog/invoice-factoring-underwriting).

### Guarantors

For each guarantor the memo summarizes net worth, liquid assets, personal debt and credit history, and notes any other guarantees already given. A guarantor with large net worth tied up in one illiquid property offers less than the headline suggests.

### Covenants

Covenants turn the analysis into ongoing checks. Common examples are a minimum coverage ratio tested each year, a limit on new debt, a requirement to deliver annual financial statements, and a limit on owner distributions. The memo should explain why each covenant was chosen and what level would trip it.

## How do analysts assign a risk rating in a credit memo?

Analysts assign a risk rating in a credit memo by scoring the loan against the bank's internal grading scale, weighing repayment capacity, collateral, guarantor strength, industry and management. Most scales have several pass grades and then the regulatory categories used for weaker credits: special mention, substandard, doubtful and loss.

Bank internal scales vary, often with eight or ten grades. The lower grades map to definitions used by bank examiners. The [FDIC RMS Manual of Examination Policies, Section 3.2 on loans](https://www.fdic.gov/regulations/safety/manual/section3-2.pdf) defines them:

- **Special mention:** potential weaknesses that deserve management's close attention, which could hurt repayment prospects later if left uncorrected. These assets are not adversely classified.
- **Substandard:** inadequately protected by the current sound worth and paying capacity of the borrower or the collateral, with a well-defined weakness and a distinct possibility of some loss if it is not corrected.
- **Doubtful:** all the weaknesses of substandard, with collection in full highly questionable and improbable.
- **Loss:** considered uncollectible and not worth carrying as a bankable asset.

A new loan is almost always proposed at a pass grade, since few banks approve a credit they would classify on day one. The analyst's job is to place it within the pass range and explain why. A loan with thin coverage, a single large customer and weak collateral might sit at the bottom pass grade, which signals the committee to watch it closely and may raise the price.

The memo should list the facts that would move the rating down, such as coverage falling below a stated level or loss of the main customer. Those triggers often become covenants. This is the core of bank credit risk analysis: the rating is not only a label for today, it is a statement of what to watch.

## Credit memo drafting errors that send deals back

Credit memo drafting errors that send deals back to the analyst are usually omissions or unsupported claims: numbers that do not tie between sections, a risk raised in the background but never mitigated, collateral values without a source, or a recommendation that ignores a weakness the analysis itself found.

A committee returns memos for reasons like these:

1. **Numbers that do not tie.** Revenue in the summary differs from revenue in the financial analysis. Total debt service in the coverage table leaves out a loan named on page three.
2. **Unreconciled statements.** Bank deposits fall well short of reported revenue and the memo does not explain the gap.
3. **Unsourced add-backs.** The analyst adds back a large "one-time" expense with no invoice or explanation.
4. **Missing mitigants.** Concentration or a declining trend appears in the analysis but not in the risks section.
5. **Stale data.** The latest financial statement is more than a year old and no interim figures were requested.
6. **Template filler.** Sections copied from another deal with the wrong borrower's facts still in them.
7. **No downside case.** The memo shows coverage only under the borrower's own projections, with no test of a weaker year.

Most of these are caught by reading the memo once as a skeptic before it goes out. A useful test is whether a committee member who opened only the memo, without the file, could check every figure in it back to a named document.

The credit memo described here is a commercial bank process. Residential lending uses its own underwriting worksheets, and brokers placing self-employed home buyers on statement-based programs work under different rules, set out in [the broker's guide to bank statement loans](/blog/bank-statement-loans-broker-guide).