How banks underwrite C&I loans.
Anatomy of a credit memo.

What "C&I" actually means

Commercial & industrial loans are loans to operating businesses for working capital, equipment, acquisitions, owner buyouts, or general corporate purposes. They are not commercial real estate loans (those have their own underwriting framework dominated by property-level DSCR — see DSCR explained). C&I borrowers are typically privately held companies between $1M and $250M in revenue. Bank credit policies treat C&I as its own asset class because the collateral is usually receivables, inventory, equipment, and a personal guarantee from the owner — not real estate.

The instruments inside a typical C&I package are some combination of:

• Revolving line of credit — secured by working capital, sized off the cash conversion cycle. See our CCC calculator for the sizing math.
• Term loan — amortized over 3–7 years, used for equipment or acquisition. Modeled in our business loan calculator.
• Equipment finance — collateralized to the specific asset, term tied to useful life. Equipment calculator here.
• SBA 7(a) or 504 — government-guaranteed wrappers used when the bank wouldn't take the deal on its own balance sheet. SBA 7(a) vs. 504 covers when each fits.

Step 1: Intake and pre-qualification

The relationship manager (RM) — the banker who answers the borrower's phone call — runs a quick screen against the bank's credit policy. The screen has maybe a dozen knockout criteria: industry codes the bank won't touch (cannabis, payday lending, adult, gambling, sometimes restaurants), minimum revenue, minimum time in business (usually 2 years), and minimum owner credit score (often 680). The RM also asks for the use of proceeds in one sentence — "buy a competitor," "refinance an SBA loan," "fund inventory for Q4."

If the screen passes, the RM sends a document request list. The standard list for a C&I deal:

• Three years of business tax returns
• Three years of company-prepared financial statements (preferably reviewed or audited)
• Interim financials within the last 90 days
• Three years of personal tax returns for each 20%+ owner-guarantor
• Personal financial statement (Form 413 for SBA) for each guarantor
• A/R and A/P aging reports
• Debt schedule listing every outstanding obligation
• Articles of organization and operating agreement
• Pro forma financials if the deal involves an acquisition or expansion

Most deals die here, not in committee — the borrower can't produce three clean years of financials, or the personal returns reveal a side business the borrower didn't disclose.

Step 2: Spreading the financials

"Spreading" is what bankers call the process of recasting the borrower's financial statements into a standardized template. Most community and regional banks use RMA-style templates (Risk Management Association formats); large banks build their own. The spread normalizes three things:

• One-time items. Insurance settlements, gain on sale of equipment, COVID-era PPP forgiveness, owner-personal expenses run through the business — the credit analyst strips these out so the trend line reflects the recurring business.
• Owner add-backs. The income statement might show $200k of "officer compensation" that is half-actual-work-comp, half-distribution. The analyst splits it: the work-comp piece stays as an expense; the distribution piece comes back as discretionary cash flow.
• Depreciation and amortization. Stripped from operating expenses to derive EBITDA, then capex is subtracted separately to get to the cash-flow-available-for-debt-service (CFADS) number that drives every downstream ratio.

The output of a clean spread is a three-year side-by-side income statement, balance sheet, and cash flow statement, plus a 12-month rolling spread that captures the most recent interim period. From that, the analyst pulls every ratio in step 3.

Step 3: The ratio battery

Different banks weight these differently, but every C&I credit memo includes some version of the following. The numbers in brackets are typical thresholds for a "pass" at a community or regional bank.

Coverage ratios

• DSCR (debt service coverage) = CFADS / total debt service. Threshold: ≥ 1.20x to 1.25x. The single most important number in the memo.
• FCCR (fixed charge coverage) = (CFADS + rent) / (total debt service + rent). Threshold: ≥ 1.10x to 1.20x. Catches lease-heavy borrowers that look fine on DSCR but are actually overcommitted. Our FCCR calculator models the post-close test.
• Global DSCR = (CFADS + guarantor NCF) / (business DS + personal DS). Threshold: ≥ 1.20x. Required on SBA deals; common at community banks for any owner-guaranteed C&I deal. Our Global Cash Flow calculator runs this end-to-end.

Leverage ratios

• Debt / EBITDA — Threshold: ≤ 3.0x to 3.5x for senior debt at community banks; up to 4.5x in middle-market with stronger borrowers. SBA tends to cap at 3.0x for the guaranteed portion.
• Debt / Tangible Net Worth — Threshold: ≤ 3.0x to 4.0x. Excludes goodwill from net worth, because goodwill doesn't pay you back if the borrower liquidates.
• Funded debt / Total capitalization — More common in middle-market and asset-based lending.

Liquidity ratios

• Current ratio = current assets / current liabilities. Threshold: ≥ 1.20x.
• Quick ratio = (current assets − inventory) / current liabilities. Threshold: ≥ 1.00x. The "if inventory turns out to be unsellable" stress test.
• Working capital in dollar terms, sized against the cash conversion cycle. A retailer with a 90-day CCC needs visibly more working capital than a SaaS company with a 30-day CCC.

Profitability and operating ratios

Less load-bearing than the coverage and leverage ratios, but they're in the memo for trend analysis. Gross margin, operating margin, return on assets, return on equity. The credit committee looks at three-year trends — flat or improving margins are fine; collapsing margins demand an explanation.

Step 4: Repayment analysis

Coverage ratios tell you whether the business can currently service its debt. Repayment analysis asks the harder question: will it still be able to in year three? This is where the credit memo earns its keep, and where bad memos get pushed back by committee. The structure is usually four parts:

• Base case projection. Take the trailing 12 months as the starting point, project 3–5 years forward using management's growth assumptions, and compute DSCR / FCCR / leverage in each forward year. The numbers should improve or hold — if leverage rises every year, the deal is being underwritten on optimism.
• Sensitivity / stress case. Hold the base case capital structure constant, then ask: what happens if revenue drops 15%? Gross margin compresses 200 basis points? A key customer leaves? Most C&I memos require DSCR to hold at ≥ 1.00x in a moderately stressed case.
• Source of repayment. Three traditional sources, in order: (1) operating cash flow — primary; (2) collateral liquidation — secondary; (3) personal guaranty + outside assets — tertiary. The memo states each explicitly. A deal where the primary source is "we expect the borrower to refinance us out in five years" is a deal the committee will push back on.
• Identified risks and mitigants. Customer concentration, supplier concentration, key-person risk, regulatory risk. For each, the memo states the mitigant (long-term contract, second-source vendor, key-person insurance, etc.). This is the section credit officers grade most harshly — vague mitigants ("management has experience") get a deal pushed back.

Step 5: Collateral and structure

What backs the loan, in what order, with what advance rates. For a typical C&I package:

• Accounts receivable — 70–85% advance rate on eligible domestic A/R (under 90 days, not government, not concentrated, not contra). Cross-aged at the 25% rule (if 25% of a customer's balance is over 90 days, the entire customer becomes ineligible).
• Inventory — 30–50% advance rate on raw materials and finished goods; 0% on work-in-process. Banks pull NOLV (Net Orderly Liquidation Value) appraisals on inventory above $1M.
• Equipment — 70–80% of OLV (Orderly Liquidation Value), which is typically 40–60% of original cost, depending on the asset type and age.
• Real estate — only if the business owns the building. 70–80% of appraised value.
• Personal guaranty — every owner with 20%+ ownership signs unlimited PG. SBA requires this; conventional C&I almost always requires it.

The structure section also specifies covenants. The standard covenant package on a community-bank C&I deal looks like:

• Maximum funded debt / EBITDA: 3.50x (steps down by 0.25x per year)
• Minimum FCCR: 1.20x, tested quarterly
• Limitations on distributions, capex, additional indebtedness, and acquisitions
• Reporting: monthly internal financials, annual reviewed statements, annual personal financial statement from each guarantor, annual personal tax returns

Step 6: Credit memo write-up

By this point the analyst has spreadsheets, projections, ratios, and a collateral package. The credit memo is the narrative document that organizes all of it into a single PDF that goes to the committee. A 50-page memo for a $5M deal is not unusual at a community bank. The standard sections, in order:

1. Executive summary. Borrower name, request amount, structure, use of proceeds, recommendation, key ratios, key risks. One page.
2. Borrower background. Company history, ownership, management bios, products, customers, suppliers, competitive position.
3. Financial analysis. Three-year trend, ratio battery, interim performance, comparison to industry (RMA Annual Statement Studies is the standard benchmark).
4. Projections and sensitivity. Base case, downside case, source of repayment, identified risks.
5. Collateral analysis. Borrowing base, advance rates, appraisal summaries.
6. Guarantor analysis. PFS summary, contingent liabilities, global cash flow, real estate schedule. For SBA, this section gets its own appendix.
7. Structure and covenants. Proposed term sheet language.
8. Recommendation. Approve / decline / approve with conditions. If conditions, the memo lists them precisely (e.g., "subject to receipt of 2026 tax returns showing pre-tax income of $X").

Step 7: Credit committee

How committee works depends on the bank's size and the deal's size. At a $1B community bank, committee meets weekly, has five voting members (CCO, two senior lenders, the chief risk officer, the CEO), and reviews 10–15 deals per session. Small deals (under $250k typically) are approved by an individual credit officer under delegated authority and don't see committee at all. Large deals (above the bank's house limit) go to participations or syndications and see committee at every participating bank.

Committee outcomes are usually one of:

• Approved as written. The deal closes on the structure in the memo.
• Approved with conditions. Specific items must be cleared before funding — usually missing documentation, a tighter covenant, a higher rate, a smaller line, or a personal guaranty from a previously unwilling guarantor.
• Tabled. Pushed back to the analyst with specific follow-ups. Usually means a risk wasn't adequately addressed in the memo.
• Declined. Less common at this stage than people think — most declines happen in steps 1 or 2 before the analyst spends 40 hours on a memo.

What the borrower sees

Almost none of the above. The borrower drops off documents to the RM, waits two to six weeks, and receives a term sheet or a decline. Smart borrowers do three things before they apply:

• Pre-screen their own deal. Run your numbers through a free Global Cash Flow calculator before you hand them to a banker. If your global DSCR is 0.85x, you don't have a financing problem — you have an operating problem the banker can't fix for you.
• Get the documents clean. Reconciled financials, current debt schedule, A/R and A/P aging current within 30 days, personal financial statement signed and dated. Sloppy documents signal sloppy operations and pre-bias the credit analyst.
• Pre-explain the risks. Customer concentration over 30%? Address it on the first call. Three years of declining revenue? Have the explanation ready. Banks are not pattern-matching for "no risk" — they're pattern-matching for "risk the borrower understands and has a plan for." The memo's risk-and-mitigants section is much easier to write when the borrower has already framed it.

Sources

FDIC Risk Management Manual of Examination Policies, Section 3.2 (Loans); OCC Comptroller's Handbook: Commercial and Industrial Lending; SBA SOP 50 10 (current version); RMA Annual Statement Studies for industry-benchmark ratios; Federal Reserve Commercial Bank Examination Manual.