What is a credit memorandum and what sections should it include?

• A. A marketing plan for the borrower.
• B. A summary of the loan requested with no analysis.
• C. A formal recommendation for credit approval or denial; includes borrower background, financials, risk analysis, collateral, terms, and recommendation.
• D. A checklist of compliance requirements only.

Answer: (C)

A credit memorandum is the formal, analytic document used to decide whether to approve or deny a loan. It presents a recommended action and the reasoning behind it, not just a summary or a compliance checklist.

The sections you’d expect in it provide a complete view of the credit request: borrower background and business context help you understand who is asking for the loan and their operating environment; financial statements and cash flow analysis show the borrower’s ability to service debt and overall financial health; risk analysis identifies the main credit risks, their potential impact, and how they’re mitigated; collateral description and appraisal explain what security backs the loan and its value; proposed loan terms lay out the structure—amount, interest rate, amortization, maturity, covenants, and conditions; and the final recommendation with rationale ties all the findings to the decision being made.

This structure ensures the decision-maker has a clear, evidence-based view of capacity, risk, and the proposed structure. Other options described as a marketing plan, a simple summary without analysis, or a compliance checklist don’t provide the full analytical basis needed to decide on credit authorization.