Credit Memo Generator

Methodology

Step 1 — Executive Summary Construction

Draft a concise executive summary that enables the approver to understand the request without reading the full memo:

• Borrower: Legal name, DBA, entity type, ownership structure
• Request: Loan amount, type, term, purpose, and source of repayment
• Recommendation: Approve/decline with key conditions
• Risk rating: Proposed risk grade with brief justification
• Key strengths: Top 3 credit strengths (in bullet form)
• Key risks: Top 3 risk concerns with mitigants (in bullet form)
• Relationship context: Existing exposure, deposit balances, ancillary business, tenure

The executive summary should not exceed one page and must enable a senior credit officer to form a preliminary view before reading the detail.

Step 2 — Borrower and Industry Analysis

Document the borrower's business model and competitive position:

• Company overview: History, legal structure, products/services, geographic footprint, number of employees
• Ownership and management: Principals, ownership percentages, key person dependencies, succession planning
• Management assessment: Experience depth, track record through economic cycles, management quality rating
• Industry analysis: Market size, growth trends, competitive dynamics, cyclicality, regulatory environment
• Competitive position: Market share, differentiation, barriers to entry, customer concentration
• SWOT analysis: Structured assessment of strengths, weaknesses, opportunities, and threats

Step 3 — Financial Statement Spreading and Analysis

Perform detailed financial analysis covering a minimum 3-year historical period plus projections:

Income Statement Analysis:

• Revenue trend (CAGR, year-over-year growth, seasonality)
• Gross margin trend and comparison to industry benchmarks
• Operating expense efficiency (SG&A as % of revenue)
• EBITDA margin and its stability/trend
• Non-recurring or extraordinary items requiring normalization

Balance Sheet Analysis:

• Liquidity: Current ratio, quick ratio, working capital adequacy
• Leverage: Debt-to-equity, debt-to-EBITDA, funded debt-to-EBITDA
• Asset quality: Receivables aging, inventory turnover, fixed asset condition
• Off-balance-sheet items: Operating leases (pre/post ASC 842), contingent liabilities, guarantees

Cash Flow Analysis:

• Cash flow from operations (CFO) — the primary source of repayment
• Fixed charge coverage ratio: (EBITDA - CapEx - Taxes - Distributions) / (Interest + Principal + Lease Payments)
• Debt service coverage ratio: NOI or EBITDA / Total Debt Service
• Free cash flow trend and adequacy for debt service plus growth investment
• Capital expenditure requirements (maintenance vs. growth CapEx)

Key Financial Ratios Summary:

Step 4 — Loan Structure and Terms

Document the proposed loan structure:

• Facility type: Term loan, revolving credit, letter of credit, construction-to-perm
• Amount and availability: Commitment amount, borrowing base (if ABL), sublimits
• Term and amortization: Maturity date, amortization schedule, balloon payment
• Pricing: Interest rate (fixed/variable), spread, floor, fee structure (commitment, unused, origination)
• Collateral: Detailed description, valuation, advance rates, lien position
• Guarantees: Personal guarantees, corporate guarantees, guarantee coverage and financial capacity
• Financial covenants: Specific covenants with testing frequency, cure periods, and consequences
• Reporting requirements: Financial statement delivery, compliance certificate, borrowing base certificate
• Special conditions: Material adverse change clause, key person provisions, change of control

Step 5 — Risk Assessment and Grading

Assign and justify the internal risk rating:

• Probability of Default (PD): Based on financial analysis, industry risk, management quality
• Loss Given Default (LGD): Based on collateral coverage, guarantee strength, structural protections
• Expected Loss (EL): PD × LGD applied to exposure
• Rating justification: Map specific financial and qualitative factors to the rating grade definitions
• Rating trend: Stable, improving, or deteriorating — with justification

Step 6 — Stress Testing and Sensitivity Analysis

Test borrower resilience under adverse conditions:

• Revenue stress: Impact of 10%, 20%, 30% revenue decline on DSCR/FCCR
• Margin compression: Impact of gross margin decline of 200–500 bps
• Interest rate stress: Impact of 200 bps rate increase on variable-rate debt service
• Collateral stress: LTV impact of 10%–20% collateral value decline
• Break-even analysis: Revenue level at which DSCR = 1.00x
• Covenant headroom: Distance from covenant trigger under stress scenarios

Step 7 — Recommendation and Conditions

Formulate the credit recommendation:

• Clear recommendation: Approve, approve with conditions, decline — with rationale
• Conditions precedent: Items required before closing/funding
• Conditions subsequent: Items required after closing within specified timeframes
• Ongoing monitoring requirements: Frequency of financial reviews, site visits, covenant testing
• Risk mitigants: Specific structural protections addressing identified risks
• Approval authority: Required approval level per delegation matrix

Output Specification

## Credit Memorandum

### Executive Summary
- Borrower: [Legal Name]
- Request: [Amount, type, term, purpose]
- Risk Grade: [Grade] ([Trend])
- Recommendation: [Approve/Decline]

#### Key Strengths
- [Strength 1]
- [Strength 2]
- [Strength 3]

#### Key Risks and Mitigants
- [Risk 1] — Mitigant: [Description]
- [Risk 2] — Mitigant: [Description]
- [Risk 3] — Mitigant: [Description]

### Borrower Overview
[Company description, ownership, management, industry position]

### Financial Analysis
[Spreading results, ratio analysis, cash flow assessment, trend commentary]

### Loan Structure
[Terms, collateral, covenants, reporting requirements]

### Risk Assessment
[Rating assignment, PD/LGD analysis, stress testing results]

### Recommendation
[Clear recommendation with conditions and monitoring plan]

### Appendices
- A: Financial statement spreads
- B: Collateral valuation summary
- C: Guarantor personal financial statements
- D: Industry research summary
- E: Organizational chart

Analysis Framework

Apply the CAMPARI framework:

• Character — Management quality, integrity, track record
• Ability — Demonstrated capacity to manage and generate cash flow
• Margin — Adequate pricing for the risk assumed
• Purpose — Clear, legitimate, and verifiable loan purpose
• Amount — Loan amount appropriate relative to need, capacity, and collateral
• Repayment — Identified, reliable, and sufficient primary and secondary repayment sources
• Insurance — Adequate collateral, guarantees, and structural protections

Examples

Example 1 — C&I Term Loan

Borrower: Precision Manufacturing LLC — $15M revenue, EBITDA $2.8M, 10-year operating history. Request: $5M 7-year term loan to fund equipment expansion. DSCR: 1.85x historical, 1.52x stressed. Debt/EBITDA: 1.8x. Collateral: First lien on all business assets including new equipment (OLV $4.2M). Personal guarantee of majority owner (PNW $8.2M). Risk grade: 4 (Pass — Acceptable). Recommendation: Approve with leverage covenant (Debt/EBITDA ≤ 3.0x) and minimum DSCR covenant (≥ 1.25x) tested quarterly.

Example 2 — CRE Acquisition Loan

Borrower: Metro Office Partners LLC — SPE acquiring 120,000 SF Class A office building. Request: $18M acquisition loan, 65% LTV, 5-year term with 25-year amortization. NOI: $1.62M, DSCR: 1.35x. Major tenant (55% of NGL) lease expires in Year 3. Risk grade: 5 (Pass — Watch). Recommendation: Approve with lease rollover reserve ($500K), cash management lockbox trigger at DSCR < 1.15x, and requirement to present re-leasing plan by Month 18.

Guidelines

• Use audited financial statements when available; note qualification if unaudited or compiled
• Normalize EBITDA for non-recurring items but disclose all adjustments with justification
• Present financial data in a consistent format matching the institution's spreading template
• Include at minimum 3 years of historical data plus 1–2 years of projections
• Document all assumptions underlying projections and stress scenarios
• Ensure the memo is self-contained — an examiner should not need to request additional information
• Use objective, professional language — avoid promotional or advocacy tone
• Clearly distinguish facts from analysis/opinion throughout the memo
• Version-control the memo with the date, author, and any subsequent amendments

Validation Checklist

• Executive summary is accurate, concise, and includes recommendation with risk grade
• Borrower/industry analysis reflects current market conditions and competitive dynamics
• Financial analysis covers at least 3 years historical with consistent spreading methodology
• All EBITDA adjustments are disclosed, justified, and defensible
• DSCR/FCCR calculated using the institution's standard methodology
• Loan structure includes all material terms, covenants, and reporting requirements
• Risk rating is supported by quantitative analysis and qualitative assessment
• Stress testing covers revenue, margin, rate, and collateral scenarios
• Collateral valuation is current and supported by independent appraisal if required
• Recommendation includes specific conditions precedent and subsequent with deadlines