I have been on both sides of a credit memo. I have written them, reviewed them, and watched deals live or die based on how well they were constructed. And after years of doing this, I can tell you that most of the credit memos lenders receive are not bad because the underlying deal is bad. They are bad because the person who wrote them did not understand what the reader actually needs.
If you are a referral partner submitting deals to lenders, understanding how underwriters read a credit memo is one of the highest-leverage skills you can develop. It will not just improve your approval rate. It will change the quality of conversations you have with lenders and the speed at which deals move through the process.
Here is what is actually happening on the other side of that submission.
The Underwriter Is Answering Four Questions
Every underwriter, regardless of institution, program, or deal size, is trying to answer the same four questions. Everything in a credit memo should be organized to answer them clearly and in order.
- Can this business repay the debt?
- Is this borrower someone we trust to manage the obligation?
- If things go wrong, what do we have to recover against?
- Is there anything in this file that should make us walk away before we get any further?
That is repayment capacity, character, collateral, and red flags. In that order. A credit memo that answers all four clearly, with supporting documentation, is a credit memo that moves. One that buries the answers, leaves gaps, or makes the underwriter work to find the information slows down or stops.
How They Read for Repayment Capacity
The first thing an experienced underwriter does with a credit memo is find the cash flow number. Not the revenue. Not the net income on the tax return. The adjusted cash flow available for debt service.
They want to see the DSCR calculation laid out explicitly. They want to know what add-backs were applied and why. They want to see whether the cash flow number is stable across the years in the file or whether it is trending in a direction that concerns them.
If your credit memo does not present an adjusted cash flow figure with a supporting add-back schedule, the underwriter will calculate their own. And their calculation will not include add-backs you did not tell them about. That gap between your number and their number is where deals get declined that should have been approved.
Present the cash flow story first. Show your work. Document every add-back with a one-line explanation. Do not make them reconstruct your analysis from raw tax returns.
How They Read for Character
Character assessment is less quantitative but no less important. Underwriters are looking for signals that the borrower is the kind of person who pays their obligations and manages their business responsibly.
Credit history is the obvious one. But underwriters are also reading the narrative sections of a credit memo for character signals. Does the borrower understand their own business? Can they articulate why they need the capital and what it will do? Do the explanations for any derogatory items sound credible and show awareness, or do they sound like deflection?
A borrower who had a rough year in 2020, can explain exactly what happened, and can show that the business has recovered with specific numbers is a very different file than one where the bad year just sits there unexplained. The first borrower demonstrates self-awareness and operational control. The second one leaves the underwriter filling in the blanks with the worst possible assumption.
Write the narrative. Explain the hard years. Let the borrower’s character come through in how they talk about their business and its history.
How They Read for Collateral
Collateral is the safety net. Underwriters know that most loans do not go into default. But they are required to think about what happens when they do, because their institution requires it and because it is their job to protect the lender’s position.
They are looking for the liquidation value of available assets, not the appraised value or the book value. What would this collateral actually recover in a distressed sale? Is there a gap between the loan amount and the recovery value, and if so, what mitigates that gap?
For SBA deals, they know the guarantee partially mitigates collateral shortfalls. But they still want to see every available asset documented and valued. Do not leave collateral out of a memo because you think it is insufficient. Put it in and let the underwriter make that judgment. Omission looks worse than a shortfall.
How They Screen for Red Flags
Experienced underwriters develop pattern recognition for the kinds of problems that blow up loans after closing. They are scanning every file for those patterns before they get invested in approving it.
UCC filings that suggest MCA stacking. Revenue concentration in one or two customers that creates fragility. Unexplained gaps between reported income and lifestyle indicators. Related-party transactions that are not disclosed or explained. Prior bankruptcies or judgments that did not surface in the credit pull but show up elsewhere.
The worst thing a referral partner can do is submit a file with a known red flag and not address it. The underwriter will find it. When they find it without your explanation, they will assume the worst and they will question everything else in the file.
Disclose and explain proactively. Every time. A red flag with a good explanation is a manageable obstacle. A red flag discovered by the underwriter is a credibility problem.
What a Strong Credit Memo Looks Like vs. a Weak One
| Element | Strong Credit Memo | Weak Credit Memo |
|---|---|---|
| Cash flow presentation | Adjusted DSCR with documented add-back schedule | Net income from tax return with no adjustments |
| Revenue explanation | Year-over-year trend with context for any variance | Raw numbers with no narrative |
| Derogatory items | Disclosed upfront with a credible explanation | Buried or omitted, discovered during underwriting |
| Collateral | All available assets listed with estimated liquidation values | Only primary collateral listed, secondary assets ignored |
| Business narrative | Clear, specific, demonstrates borrower understands their business | Generic or missing entirely |
| Use of proceeds | Specific and tied to a business outcome | Vague or disconnected from the financial story |
| Red flags | Identified and addressed before the underwriter finds them | Left for the underwriter to discover and interpret |
The Memo Is the Argument
Here is the frame I want you to take away from this.
A credit memo is not a document dump. It is an argument for why this deal should be approved. Every section should advance that argument. Every piece of data should support a conclusion. Every potential objection should be addressed before it is raised.
The underwriter reading your memo is not your adversary. They are trying to get to yes. The ones who approve the most deals are the ones whose files make it easiest to get there. Give them what they need to say yes, organized in the way they need to receive it, and you will close more deals than you lose.
If you have a file you are not sure how to present, or one that has some complexity you are not sure how to address in the memo, bring it to me before you submit it. That conversation is worth having early.
