New Law Enables Loans Secured by Business Value: Major Banks in Japan Prepare for Implementation

This law aims to make it easier for startups without substantial physical assets and small businesses facing succession issues to obtain funding. However, banks will need to accurately assess the growth potential of these companies.

The "Business Finance Promotion Act," passed on June 7, will take effect within two and a half years after updating the collateral registration system. The law's main feature is the introduction of "business value collateral rights," which lets a company use its overall business value as collateral.

Traditionally, banks require collateral or guarantees to reduce the risk of non-repayment, often using the business owner’s personal assets or the company’s real estate. Assets like inventory or receivables can also serve as collateral, but this can jeopardize essential business operations if the company faces financial trouble. Startups, which often lack such tangible assets, find it hard to secure loans.

With the new law, loans can be extended to companies with promising business models, even if they lack significant assets. However, since this type of collateral is directly tied to the company's performance, banks will need to monitor and support these businesses closely.

In response to the new law, major banks are exploring its applications. Mizuho Financial Group has held brainstorming sessions to come up with ideas for using business value collateral, leveraging its expertise from similar methods through Mizuho Trust Bank. Sumitomo Mitsui Banking Corporation has conducted internal study sessions with external experts to identify practical issues and prepare for implementation.

Evaluating intangible assets like know-how, technology, and growth potential requires significant expertise. Many regional banks rely on traditional financial statements and automated evaluations. Assessing business value will require new skills, such as using discounted cash flow methods, which are less familiar to these institutions.

The Financial Services Agency (FSA) has been encouraging banks to focus on "business finance," lending based on a company's growth potential rather than relying on collateral or guarantees.