After you submit a loan application, lenders create a credit memo—an internal document summarizing your financial history, loan details, and risk factors. This memo, sometimes called a loan write-up, guides loan officers and credit committees in their approval decisions.

Unlike a retail credit memo for returns, a lending credit memo outlines your financial story and the likelihood of repayment. It standardizes evaluations, ensuring consistent and documented decisions required for audits and regulatory compliance.

Most credit memos assess applicants using the “Five C’s of Credit”:

  1. Character: Your credit history, employment stability, and reputation show your reliability.
  2. Capacity: Income and debts analyzed mainly through Debt-to-Income (DTI) ratio or Debt Service Coverage Ratio (DSCR) for businesses, indicating ability to repay.
  3. Capital: Your own investment or net worth demonstrates commitment to the loan.
  4. Collateral: Assets pledged to secure the loan protect the lender if repayment fails.
  5. Conditions: The loan’s purpose, amount, interest rate, term, and economic context affect risk assessment.

For example, if Sarah applies for a $40,000 business loan to buy a food truck, the credit memo will detail her credit score, business experience, projected cash flow, collateral value, and market conditions to recommend approval.

Credit memos are generally not shared with borrowers since they contain proprietary lender analysis. However, you influence your memo by submitting accurate financial documents and maintaining good credit.

To understand more about loan approval conditions can provide insights into the final steps of the lending process. Also, getting familiar with loan-to-income ratio helps grasp capacity evaluations, a critical credit memo element.

For official guidance, the U.S. Small Business Administration details the Five C’s of Credit used by lenders to assess borrowers.

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