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What is a credit memo in lending?

In lending, a credit memo is the internal document that sets out the case for a loan decision. It names the borrower, the request, the analysis, the risks and the recommended terms. The decision maker reads it and approves, changes or declines. It is also called a credit approval memo or credit paper.

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How lenders use it

The credit analyst writes the memo. A credit committee or an authorised approver reads it. The memo gives them what they need to decide without opening every document, and it stays on file to show why the lender made the decision.

Most memos follow the same order. They open with a summary of the request and a recommendation. Then they cover the borrower and its owners, and the purpose of the loan and how it will be repaid. After that come the financial analysis, the security and guarantees, and the main risks with what offsets each. They end with the proposed terms and conditions.

The financial section usually holds the ratios, such as the debt service coverage ratio, with the figures and where they came from. Reviewers can then trace each number. A memo with no sources is hard to challenge and hard to audit.

The memo should say where the analyst is unsure, which checks are open and which conditions must be met before funding. An AI intake step can fill in the facts and their sources. The analyst writes the view and the approver decides.

Worked example

Example only. A short memo might read like this. Request: £250,000 five-year loan to buy two machines. Borrower: a manufacturer trading since 2016. Repayment: cash flow, with a DSCR of 1.4 after the new loan.

Security: a charge over the machines and a limited personal guarantee of £100,000. Main risk: one customer is 35% of sales. Offset: a three-year contract with that customer. Recommendation: approve, subject to a signed contract and insurance. The approver adds one condition and signs.

Common confusions

In accounting, a credit memo means a credit note. A seller sends a credit note to a customer to reduce what the customer owes, for example after a return or a pricing error. That is a different document. This page is about the lending meaning.

A credit memo is not a credit report. A credit report comes from a bureau and describes a borrower's payment history. A credit memo is the lender's own analysis, and it may quote a credit report.

A credit memo is not the offer letter. The offer goes to the borrower. The memo is internal and often holds frank views that the borrower never sees.

Questions lenders ask

What is the purpose of a credit memo?

It records why the lender recommends a decision. The approver can decide from one document, and the lender can show later what it knew and how it reasoned. Regulators and auditors often ask to see it.

What should a credit memo include?

The request, the borrower and owners, and the purpose and source of repayment. Also the financial analysis, the security, and the risks with what offsets them. Then the proposed terms and the recommendation. Each fact should point to its source document.

What is a credit memo example?

A short one has a request line, a borrower summary, a ratio table, a security line, two or three risks with offsets and a recommendation with conditions. The example on this page shows the shape on a small loan.

Is a credit memo the same as a credit note?

No. A credit note in accounting reduces a customer's bill. A lending credit memo is an internal analysis that supports a loan decision. Both can be called a credit memo, so check the context.

This page is general information for lenders. It is not legal, tax or credit advice.

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