Japan to Propose New Legislation to Unlock Loans for Businesses Based on Growth Potential Without Property Collateral

• 20 November 2023
• International News
• 1389 Views

The Japanese government is set to introduce groundbreaking legislation aimed at enabling emerging startups and small to midsize enterprises (SMEs) to secure loans based on their growth potential, rather than traditional collateral like real estate, according to The Japan News published on 16 October 2023.

This strategic move is part of a comprehensive economic stimulus package scheduled for finalization by the end of October, with the Financial Services Agency planning to submit a bill during the next ordinary Diet session as a special law under the Civil Code.

Traditionally, companies rely on tangible assets, such as land and buildings, to secure loans. However, this practice often creates obstacles for emerging companies with few physical assets, even when they have a promising business outlook.

The new law seeks to establish a system that allows businesses to obtain loans by leveraging the combined appraised value of their tangible and intangible assets. In addition to conventional collateral, this innovative approach will include a company’s unique know-how, technological capabilities, customer base, and transaction data as potential assets.

This change is not only beneficial for startups but also extends to SMEs, including long-established ryokan inns and restaurants. Their local recognition and established trust with business partners will be considered, making it easier for them to secure loans.

Financial institutions will have the flexibility to increase the number of loans that don’t rely on real estate collateral as a recipient’s collateral values improve due to business growth. If a company or person has more valuable assets, like money in the bank or valuable items, banks are more likely to give them a loan even without needing to use their property as a guarantee. In other words, having more valuable stuff can help you borrow money more easily.

Japan’s innovative legislation is a remarkable step in addressing the financial challenges posed by the global economic downturn. However, the approach is not without risks, as loans may become uncollectible if a company’s financial situation deteriorates. To mitigate these risks, lenders will need to enhance their ability to understand their clients’ businesses thoroughly and assess their growth potential through continuous financial evaluations.

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