How private credit evaluates a borrower.

The reviewer's mental model

A senior lender is not trying to predict how your business will grow. The lender is trying to predict, with conviction, that your business will service its debt under conditions worse than today. That is a different exercise from an equity underwrite. The equity buyer reads to the upside case and discounts it. The lender reads to the downside case and insists on cushion. Everything in the term sheet — the pricing, the covenant package, the amortization schedule, the cash sweep mechanics, the reps and warranties — is a structural expression of how much cushion the lender requires given what the credit memo concluded about the business.

In the first hour with your materials, the credit team is running a few specific tests. They are asking whether the trailing financial picture is internally coherent. They are asking whether the cash flow available for debt service is stable enough to model, or whether it bounces by amounts that would exceed the proposed cushion. They are asking whether the collateral, if collateral matters at this layer of the capital stack, is what it appears to be. They are forming an early opinion about which type of credit memo this turns into: the clean one that goes through committee in two weeks at the quoted spread, the structured one that comes back with tighter covenants and a few extra basis points, or the one the team declines.

In the first week, the credit team is building the downside case. Most operators are surprised at how granular this work gets. The lender stresses your trailing EBITDA for the specific kinds of pressure their portfolio history says are most likely: a customer concentration event, a margin compression cycle, a working-capital absorption, a key-person transition, a covenant default at the prior credit because of a one-time issue. They model your fixed-charge coverage in each scenario. They calculate how many months of headroom you would have at each covenant level before a technical default. The credit memo's confidence rests on that math.

By the time the term sheet is drafted, the lender has a private model of your business that focuses sharply on cash flow, leverage capacity, and the specific failure modes the credit team has seen before. That model is built around the same ten-axis framework an equity reviewer would apply — but the weights are different, the gating constraints are different, and two of the eight calibrating axes carry far more weight than they would for an equity buyer.

The ten things every reviewer reads to (lender weighting)

The same ten axes a sophisticated PE buyer applies show up in a senior lender's read of your business, but the weights shift. The lender does not own the equity, so the calibrating axes that affect the equity story — customer concentration, key-person dependency, growth-stage governance — read differently. The gating axes get heavier. The axes that predict cash-flow stability and covenant capacity get heavier. The axes that predict equity-side upside get lighter.

1. Financial consistency (gating, heavier than for equity)

A lender depends on the trailing numbers more than an equity buyer does, because the entire downside case is built on the trailing baseline. When the financials do not reconcile across the documents that should support them — the tax returns, the bank statements, the internal ledgers, the customer revenue rollup — the credit memo cannot establish a baseline EBITDA with the conviction the committee requires. The deal does not progress. The work above this axis cannot be trusted, and the lender either walks or scopes a remediation period before re-engaging.

2. Data integrity (gating)

The credit memo's defensibility inside the institution depends on whether the inputs to the analysis were verifiable. A lender who books a loan against numbers that cannot be tied back to source systems is taking documentation risk that does not exist in the spread. Most institutional credit shops will not take that risk. Data integrity issues that an equity buyer might price into the deal, a lender treats as a precondition.

3. Stress tolerance (much heavier than for equity)

This is the axis that swings the most weight relative to the equity reviewer's framework. The lender is underwriting the downside. Stress tolerance — how the business performs under demand softening, customer renegotiation, margin compression, working-capital pressure, rate moves — is the axis that determines the covenant package. Strong stress tolerance, evidenced by historical operating responses or documented contingency plans, supports a lighter covenant structure. Weak stress tolerance, or the absence of any historical evidence that the business has been stressed, tightens the covenants and frequently changes the leverage multiple the committee will approve.

4. KPI completeness (different emphasis)

A lender reads KPI completeness through a cash-flow lens. Working capital metrics. Customer-level revenue stability. Days-sales-outstanding and aging analysis. Inventory turns if applicable. Customer churn or revenue retention. Gross margin stability by segment. The lender is not looking for marketing metrics. They are looking for the operational indicators that predict whether the cash flow available for debt service in the next twelve months is going to match the cash flow available for debt service in the last twelve. Gaps in this axis show up directly in the covenant package, often in the form of monthly reporting requirements that tighten what would otherwise be quarterly compliance.

5. Reporting maturity

How quickly can the business produce a closed monthly book that the lender can rely on for covenant compliance? Most credit agreements require monthly or quarterly financial delivery within thirty to forty-five days of period end. A business with a long, inconsistent close cadence either gets structured covenants that allow for the delay (rare) or builds the close discipline as part of the financing (common). The reporting maturity axis often determines whether the credit relationship is going to feel administratively heavy or light from the borrower's side.

6. Customer concentration (read for credit risk, not upside)

An equity buyer reads customer concentration as a discount on the valuation. A lender reads it as a tail-risk event that could cause a covenant breach. The math is different. A lender stresses the case in which the top customer renegotiates downward, departs, or extends payment terms — and checks whether fixed-charge coverage holds at each step. When the stress cases blow through the proposed covenant cushion, the lender either tightens the covenant package, lowers the leverage multiple, or both. Customer-concentration findings in lender credit memos almost always translate into specific structural terms.

7. Key-person dependency

A lender reads key-person dependency through the lens of operational continuity. If the founder or one or two indispensable executives left tomorrow, would the business continue to generate the cash flow the loan depends on? When the answer is uncertain, the lender protects against the uncertainty — often through key-person life insurance assignments, change-of-control provisions, or tighter covenants around management changes. The cost is rarely the insurance premium; the cost is the limitation those provisions place on the borrower's flexibility during the term of the loan.

8. Operational risk (read for catastrophe, not for variance)

A lender reads operational risk for the catastrophic downside: the supply-chain single point of failure, the regulatory exposure that could halt operations, the litigation that could consume cash, the insurance gap that could leave the business exposed. The lender is not pricing ordinary operational variance — that gets absorbed by the covenant cushion. They are checking for the tail risks that could move the loan from performing to non-performing in a single event. Operational risks that surface late in the credit process almost always reopen the term sheet.

9. Management responsiveness

During underwriting, this axis is read the same way an equity buyer reads it — as a leading indicator of the post-close relationship. The lender is committing to a multi-year credit relationship. The diligence period is the free preview. Slow, inconsistent, or evasive responses during underwriting almost always reappear during the first covenant-compliance cycle, and the credit team has seen the pattern enough times to weight the axis seriously even when the financial picture is otherwise strong.

10. Governance (read differently than for equity)

A lender does not read governance for board-level decision-making the way an equity buyer does. They read it for the discipline that surrounds the decisions that affect credit — distributions, capital expenditures, acquisitions, changes in the operating plan. Strong governance, expressed in decision logs and policy frameworks, supports a lighter permitted-action package in the credit agreement. Weak governance gets compensated for in the agreement's consent requirements and negative covenants.

The math the credit memo runs (and how to read it backward)

A senior credit memo is built around three numbers, and understanding how they relate is the most useful piece of mechanical knowledge a borrower can carry into a process.

The trailing EBITDA baseline

The starting point is trailing twelve-month EBITDA, adjusted for items the lender accepts as one-time, non-recurring, or owner-discretionary. The lender is conservative about adjustments. The financial-consistency axis determines how confidently the lender can establish this number, and the KPI-completeness axis determines how confidently they can model what next-twelve-month EBITDA looks like under stress. When either axis is weak, the lender shaves the baseline — which directly reduces the leverage multiple the committee will approve.

The proposed leverage multiple

Total debt divided by trailing EBITDA. Different layers of the capital stack support different multiples. Senior secured unitranche financing in the lower middle market typically supports three to four-and-a-half turns of EBITDA, with stronger businesses supporting more. The lender sets the multiple based on the credit memo's reading across the ten axes — particularly stress tolerance, customer concentration, and KPI completeness. Most borrowers focus on the multiple as if it were a single negotiated number. It is actually the output of the framework reading.

The fixed-charge coverage ratio under stress

The lender stresses the EBITDA baseline by twenty, thirty, or forty percent — depending on the credit policy of the firm — and recalculates fixed-charge coverage. The covenant package is set to give the borrower headroom in the most likely stress scenarios while still triggering a structured conversation before a covenant breach turns into a default. When the stress math is tight, the lender either reduces leverage, tightens covenants, or builds in cash sweeps and excess-cash-flow recapture provisions that ratchet the structure if performance softens.

Reading the framework backward: the term sheet's shape — the leverage, the covenant package, the amortization, the permitted-action restrictions — is a structural expression of the credit memo's reading of the ten axes. Borrowers who understand the axes can read the term sheet as feedback about where the lender saw weakness. Borrowers who do not, often interpret the term sheet's tightness as a negotiating posture, which it almost never is. It is the math.

The common findings that quietly tighten the term sheet

A trailing EBITDA the lender shaves on first read

Add-backs the borrower considers reasonable that the lender considers aggressive. One-time items that look recurring when the lender pulls multiple years of history. Owner compensation adjustments that don't reconcile to a replacement-cost baseline. The lender's shaved EBITDA becomes the baseline for everything downstream — leverage, covenants, debt service capacity. A borrower with a well-documented adjustment story protects the baseline. A borrower without it accepts the lender's number.

A close cadence the credit agreement will struggle to accommodate

Most credit agreements require thirty- to forty-five-day monthly or quarterly reporting. A business that closes its books in sixty or ninety days either gets a structured accommodation with reporting penalties, or commits to tightening the close as a condition of the financing. Either way, the close cadence becomes a covenant. Borrowers who tighten the close in advance avoid the negotiation; borrowers who do not, accept it.

Customer concentration that survives the stress test

When the top customer is over twenty-five percent and the lender's stress case projects fixed-charge coverage below the proposed covenant cushion if that customer renegotiates, the lender either lowers the leverage, tightens the covenants, or both. The borrower whose concentration is well-explained — multi-year contracts, switching costs, documented relationship depth, diversification trajectory — gives the lender room to keep the structure light. The borrower whose concentration is unexplained accepts the structural response.

A working-capital cycle the lender does not want to fund

Long cash-conversion cycles, growing receivables aging, inventory builds that absorb cash — these are the operational signals lenders treat as direct evidence about the credit's quality. When the working-capital pattern is consistent with the seasonal or growth-stage profile, the lender funds it through a revolver and structures the agreement accordingly. When the pattern is inconsistent or worsening, the revolver gets smaller, the borrowing base gets tighter, and the credit memo notes the trend as a watch item — which often becomes a tighter compliance regime in year one.

Operational or legal exposures that surface late

Pending litigation that surfaces in counsel's review. An environmental matter the borrower considered immaterial. Insurance gaps that the lender's policy review flagged. Single-vendor dependencies the borrower had not catalogued. These do not necessarily kill a financing — but they consistently reopen the term sheet at the moment the borrower has the least leverage to push back, and the lender's response is almost always to add specific carve-outs, consent requirements, or representations that constrain the borrower's flexibility over the term of the loan.

What this implies for a borrower considering a financing

The framework above is not a checklist to perfect before a process. It is a reading map. It tells you what the credit committee is going to read to, so you can decide which parts of your business to surface, which to remediate, and which to accept will translate into structural terms in the agreement.

The borrowers who get the best outcomes are not the ones with the cleanest businesses. They are the ones with the most structurally honest read of their own business before the process begins. They know which of the ten axes will support the leverage they want and which will limit it. They know which findings to address proactively (because findings that surface during underwriting always carry a tighter structural response than findings that were already addressed) and which to surface explicitly with context. They walk into the process with a working model that is in the same shape as the model the credit committee is about to build.

The work is most useful when done early. Stress-tolerance evidence cannot be created in the diligence window. A close-cadence improvement cannot be installed in two months. A customer-concentration trajectory cannot be re-shaped in the time it takes to negotiate a term sheet. The framework rewards borrowers who read it twelve to twenty-four months before a financing event — and penalizes, structurally, the ones who read it during.

What the artifact accomplishes

Capital Refinery is the system that grades an operating business against this exact framework — the ten axes, the two gates, the lender-weighted calibrating logic — and produces a structured, fingerprinted, forwardable artifact. The artifact names what is institutional-ready, what is not, what the gating issues are if any, and what specifically would change the verdict. The framework is the same framework a senior lender is about to apply. The point of running it on the borrower's side, before the credit process begins, is that the work and the consequences happen on the borrower's timeline rather than the lender's.

The entry point is a Self-Assessment — a $750 operator-attested read across the same ten axes, produced as a structured memo with a verifiable fingerprint. It is not a substitute for the document-graded Gap Review or for the full Institutional Readiness Assessment that a committee-grade credit memo will eventually want to read against. It is the first calibrated reading. For most borrowers, it is the first time they have seen their own business in the structure the credit committee is going to use.

Borrowers who already work with a fractional CFO, a debt advisor, or a banking relationship should run the assessment with that advisor, not around them. The artifact is designed to be the calibrated read the advisor uses to anchor the conversation about which findings to remediate, which to surface, and which to price into the financing strategy. The work of getting institutional-ready belongs to the advisor and the operating team. The work of measuring the gap is what the artifact does.