What's in This Section
- How to spread business and personal tax returns for credit analysis
- Balance sheet analysis — assets, liabilities, and what the numbers reveal
- Global cash flow construction and analysis
- DSCR calculation methodologies and common variations
- Collateral analysis — advance rates, valuation, and perfecting liens
- Investment property analysis — NOI, cap rate, rent roll, and debt yield
- Line of credit underwriting — BBC, cash cycle, and covenant structuring
- Construction loan analysis — draws, budget tracking, and completion risk
Who This Is For
- Commercial loan officers learning credit analysis fundamentals
- Credit analysts building underwriting skills
- Relationship managers who want to understand what credit is looking for
- Lenders who send declined applicants to BankLiterate for preparation
- SBA lenders, CDFI staff, and SBDC counselors
- Anyone who wants to understand how commercial credit decisions are made
The Fundamentals
How to Spread Financial Statements
Spreading is the process of normalizing and standardizing a borrower's financial statements for credit analysis. Here's the standard process used by commercial credit analysts.
01
Gather All Documents
3 years of business tax returns (all schedules), 3 years of personal tax returns for all guarantors, current year-to-date P&L and balance sheet, and bank statements for validation.
02
Validate Consistency
Before entering any numbers, cross-check: Does P&L revenue match tax return revenue? Do balance sheet retained earnings tie to cumulative net income? Do bank deposits match stated revenue? Flag all discrepancies.
03
Spread the Income Statement
Enter revenue, COGS, gross profit, and all expense categories from the tax return. Calculate gross margin, operating margin, and net margin for each year. Identify trends — is the business growing, stable, or declining?
04
Spread the Balance Sheet
Current assets, fixed assets, current liabilities, long-term liabilities, equity. Calculate current ratio, quick ratio, debt-to-equity, and debt-to-tangible net worth. Identify CPLTD from prior year for DSCR denominator.
05
Calculate DSCR
Numerator: Net income + D&A + Interest − Distributions. Denominator: Prior year CPLTD + Interest. Apply consistently across all 3 years. Note trend direction — is DSCR improving or deteriorating?
06
Global Cash Flow
Add personal income sources. Add personal debt service (mortgage, auto, student loans, CC minimums). Calculate global DSCR. Identify whether global picture is stronger or weaker than business alone.
Quick Reference
Key Ratios & Standard Thresholds
Standard commercial banking ratio thresholds. These vary by institution, loan type, and industry — use as a starting framework, not a rigid rule.
Commercial Lending Ratio Reference
Debt Service Coverage (DSCR)
Cash Flow ÷ (CPLTD + Interest)
Min: 1.20-1.25x | Strong: ≥1.35x
Current Ratio
Current Assets ÷ Current Liabilities
Min: 1.10-1.20x | Strong: ≥1.50x
Debt-to-Tangible Net Worth
Total Liabilities ÷ (Equity − Intangibles)
Max: 3.5-4.0x | Strong: ≤2.0x
Debt-to-Total Assets
Total Liabilities ÷ Total Assets
Max: 70-80% | Strong: ≤60%
Gross Profit Margin
Gross Profit ÷ Revenue
Industry-specific; trend matters most
Net Profit Margin
Net Income ÷ Revenue
Min: 3-5% | Strong: ≥8-10%
LTV (Real Estate)
Loan Amount ÷ Appraised Value
Max: 75-80% | Strong: ≤65%
Debt Yield (CRE)
NOI ÷ Loan Amount
Min: 8-10% (below = overleveraged)
A/R Days Outstanding
(A/R ÷ Revenue) × 365
Varies; compare to industry & prior years
In-Depth Topics
Credit Analysis by Subject
Deep-dive guides on the specific areas of commercial credit analysis that matter most in day-to-day underwriting.
Spreading
How to Spread Business Tax Returns
The complete process for spreading 1120-S, 1065, Schedule C, and 1120 returns — including how to handle addbacks, distributions, guaranteed payments, and depreciation schedules. With worked examples.
Read article →
Balance Sheet
Balance Sheet Analysis for Commercial Credit
How to read a business balance sheet like a credit analyst — what assets are worth in a liquidation scenario, how to calculate tangible net worth, and what the CPLTD tells you about debt management.
Read article →
Global Cash Flow
Constructing a Global Cash Flow Analysis
Step-by-step construction of global cash flow — combining business and personal income statements, handling rental properties, K-1 income, and Schedule E, and calculating the global DSCR.
Read article →
Investment Property
Investment Property Underwriting: NOI, Cap Rate & Debt Yield
How to analyze income-producing real estate — from rent roll analysis and vacancy assumptions through NOI calculation, cap rate valuation, debt yield stress testing, and sensitivity analysis.
Read article →
Rent Roll
Rent Roll Analysis & Lease Roll-Off Risk
How to analyze a rent roll — evaluating tenant quality, lease expiration concentration risk, renewal probability, and the income implications of near-term lease roll-off. With worked examples.
Coming soon →
Lines of Credit
Line of Credit Underwriting & BBC Analysis
How to underwrite a revolving line of credit — cash cycle analysis, A/R and inventory quality assessment, borrowing base certificate construction, and the resting period covenant.
Read article →
Construction
Construction Loan Underwriting Framework
The complete framework for construction lending — LTC and LTV analysis, draw schedule structure, inspection requirements, completion risk assessment, and the permanent loan takeout underwriting.
Use Construction Tool →
Credit Writing
How to Write a Commercial Credit Memo
Structure, content, and best practices for commercial credit memoranda — what credit committees look for, how to present risk factors and mitigants, and how to make a compelling recommendation.
Read article →
Tools
Tools Useful for Loan Officers
The same tools borrowers use — useful for quickly modeling scenarios and verifying calculations.
Quick Ratio Snapshot
Run a quick DSCR and ratio triage
Amortization + DSCR + Term-Out
Model loan payments and LOC term-out impact
Borrowing Base Certificate
Calculate eligible LOC collateral
Construction Loan Analyzer
LTC, LTV, draw schedule, budget tracking
Personal Financial Statement
Verify borrower PFS calculations
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