How a Commercial Credit Decision Is Made

Stage one: initial data gathering

When a limited company submits an application, the lender first collects identity verification and Companies House confirmation to establish that the entity exists, is trading, and has not been struck off or entered insolvency proceedings. Directors' identities are verified against anti-money-laundering and sanction-screening databases. Credit bureau data — typically from Experian, Equifax, or Creditsafe for business credit files — is pulled on the company and frequently on the personal credit files of directors and key shareholders.

The lender also requests financial statements, usually the last two to three years of filed accounts plus management accounts if the most recent filed period is more than six months old. Bank statements covering at least three to six months are standard for most SME facilities.

Stage two: financial analysis and affordability modelling

The underwriter analyses EBITDA, net profit, cash conversion, and debt-service coverage ratios. The debt-service coverage ratio (DSCR) — broadly, annual operating cash flow divided by annual principal and interest obligations — is a central metric. Most commercial lenders require a DSCR of at least 1.25x, meaning the business generates 25% more cash than is needed to service the proposed debt. Below that threshold the facility is typically declined, restructured, or requires additional security.

Revenue concentration is also assessed: if more than 20–30% of turnover comes from a single customer, the lender treats that as a material risk and may stress-test the figures assuming that customer is lost. Sector and macro factors — cyclicality, regulatory exposure, competitive dynamics — are layered in at this stage.

Stage three: credit scoring and committee

Most lenders combine a quantitative scorecard — numerical weights assigned to financial ratios, credit bureau data, and behavioural signals — with a qualitative credit memorandum prepared by the underwriter. For facilities within a lender's delegated authority limits, a single senior underwriter can approve the application. Larger, more complex, or borderline facilities are escalated to a credit committee, which typically includes a chief credit officer and may meet weekly or fortnightly.

The committee considers whether the facility is within the lender's appetite for the sector and borrower profile, whether adequate security is available, and whether any conditions precedent are required before drawdown. The output is an approval, a decline, or a conditional approval specifying what must change before the lender will proceed.

Stage four: conditional offer and due diligence

A conditional offer letter sets out the indicative facility size, term, pricing, security requirements, and any special conditions. It is not a binding commitment to lend; it is an agreement to proceed to formal legal due diligence. At this stage the lender's solicitors conduct legal and property searches, review the company's existing charge register at Companies House, and prepare security documentation. Only once all conditions are satisfied does the lender issue a facility agreement and release funds.