SBA 7(a) Paperwork Explained: Lender's Credit Memorandum

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The SBA definitely places importance on your credit score. However, lenders still like as little risk as possible when they're looking to approve a business owner for a small business loan.

That's why many lenders prefer to use the 7(a) Lender’s Credit Memorandum. Here's how it works: the Lender's Credit Memo contains information about your creditworthiness. The lender passes this document along to the SBA.

Take your preparation of this memo seriously, since the SBA seems to be cracking down on poor documentation and what they call “sloppy underwriting.”

What Goes Into the Lender's Credit Memorandum?

While the goal of the memo is for you to persuade the lender that you're trustworthy, ,the document should be specific and objective – not emotional or simplistic. The Lender’s Credit Memorandum should also exactly match the information you provided on the SBA Form 1919.

The information you present in the Credit Memorandum will determine whether or not you seem capable of repaying the loan. Lenders often use their own scoring criteria to judge your credit history, your character and reputation, and the strength of your business.

The SBA will be interested in why you can’t obtain credit elsewhere, and if you can support loan repayment with your own cash flow. Your lender’s explanation needs to be specific enough to show an identifiable weakness in your credit and still reassure the SBA that you’ll be able to pay.

While the purpose of the SBA 7(a) Lender’s Credit Memorandum is to persuade the SBA to approve the loan, you and your lender should do your best to communicate honestly. However, there are a few tips you can use to present your case in the best possible light:

  • One analysis showed that the average approved memo uses just slightly more positive words than negative. Try using positive words, even when explaining negative events.
  • The credit memo should focus on identifying the three to five largest risks related to the loan, and then present any mitigating factors that would reduce those risks. Mitigating factors could be found in your business structure or related to cash flow or collateral.
  • Don't include risks that affect every borrower, such as a widespread recession.
  • Share the weaknesses of your financial situation first, then the strengths. Finally, make a good case for why the strengths outweigh the weaknesses.

Increasing the Chances of Credit Memo Approval 

For your Lender’s Credit Memorandum to have the best chance of avoiding SBA screen-out, be as clear and transparent as possible. Set the stage by providing a brief description of the history of your business and a more detailed description of your management team. Include relevant details about their management and industry experience. The SBA also requires verified IRS transcripts, and expects you to break down how you plan to use all loan proceeds.

The SBA also expects your 7(a) Lender's Credit Memorandum to explain how your business generates its income. For this, include clarification for any past or current issues. Be sure to document your collateral in-depth, with attention to SBA collateral requirements (including life insurance).

Provide specifics on equity and seller financing, including applicable terms and uses. The SBA will also be looking for you to address any credit elsewhere (such as life insurance, affiliation, franchise info and working capital), as well as existing shareholder debt. Attach backup documentation wherever you can.

Get to the point quickly. Due to the number of applications for SBA 7(a) loans received by the SBA, the clarity of your Lender’s Credit Memorandum will increase the likelihood of positive reception. Only a few minutes are generally spent evaluating each loan, so try using organizational elements such as headings, bullet points, and boxes to call the memo reader’s attention to the right information – and quickly.  

Don’t forget to include a lease schedule summary (if applicable)! The SBA’s assessment of your cash flow and stability is very much impacted by your lease structure and credit, which many Lender’s Credit Memorandums tend to omit. You’ll need to explain the terms, price, renewal options, lease credit strength, and any co-tenancy clauses.

Get Ready for Your Lender’s Credit Memorandum

You should be able to answer the following questions, which your SBA 7(a) Lender’s Credit Memorandum needs to address:

  • What is the history of your business?
  • Who makes up your management team, and what are their industry and management credentials?
  • Compared to total Debt Service Coverage, is your net operating income ratio at least 1:1?
  • Has your lender reconciled your business and personal financial data against IRS transcripts?
  • Can you provide an owner/guarantor analysis?
  • Can your lender confirm life insurance requirements?
  • Can you justify and specifically explain any refinancing?
  • Assuming your lender is recommending approval, have they documented how they made their decision?
  • Can you provide a credit analysis? 
  • Is a change of business ownership involved? If so, can you show a business valuation explains how this change of ownership benefits your business? 
  • Can you explain any relevant liens, judgments, and bankruptcies? 
  • Do you have details on your collateral?
  • Have your historical financial statements been reviewed and analyzed by your lender?
  • Has your lender explained how they estimated your projected cash flow?
  • Do you have any working capital?

SBA 7(a) Credit Memorandum Format

Once you’ve prepared by answering the questions above, the information needs to come together in a simple and consistent format. The document can be structured however you like, but be sure it includes all of the following clearly and concisely. Break it down into sections for readability, and include: 

  1. Full contact information.
  2. Loan request. Include pricing and terms and conditions.
  3. Comprehensive credit analysis. Include cash flow, collateral, key ratios, trend analysis, and management analysis. The SBA may value management analysis over financial analysis, so the memorandum drafter must explain why your management is a key factor in reducing risk.
  4. Formal, detailed risk assessment and risk mitigation. 
  5. Appendix and supporting materials. If you need to include financial spreads for cash flow, collateral coverage or stress testing, add and label it in this section. 

Double Check Your Credit Memo – Then Check Again

Once your memo is complete, be sure to fully review your Lender’s Credit Memorandum for the most common reasons an SBA 7(a) gets denied during credit memo review:

  • Did your lender address life insurance?
  • Did your lender verify and certify all financials against official IRS transcripts?
  • Is a schedule of collateral both included and complete?
  • Do your draft authorization and credit memorandum sync?
  • Is your "use of proceeds" explanation completely clear?
  • Have your notes to be refinanced been clearly identified?
  • Is any justification for refinance properly addressed?
  • Has your need for working capital been fully addressed?
  • Has any derogatory credit been clarified?
  • Has any collateral shortfall been clearly addressed?
  • Are all projections clearly justified?

And of course, if you have any questions at all about the SBA 7a Loan application process, don't hesitate to message us. We're here to help!



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