Introduction
A new system called the “enterprise value security right,” which allows financial institutions to lend based on a company’s future potential, is set to begin with the enforcement of the Act on Promotion of Business-Related Finance. Until now in Japan, when companies sought financing, it was common for them to pledge tangible assets such as real estate or factories as collateral, or for the business owner personally to assume joint and several guarantee obligations. As a result, startups and small and medium-sized enterprises, despite possessing value in the form of technology, know-how, and customer bases, have often faced difficulties securing sufficient funding because they lacked visible assets.
This new system is intended to encourage lending based on future potential by evaluating such companies’ intangible assets and the value of the business as a whole as collateral. In addition to supporting the growth of startups, it may also provide a tailwind for business succession among SMEs, where management guarantees have long been a heavy burden. On the other hand, financial institutions will be required to undertake more sophisticated business evaluations than ever before, and there are also cautious views regarding how widely the system will be adopted.
What this news suggests goes beyond the mere creation of a new collateral system. I believe it raises a deeper question: whether Japan’s lending practices themselves can shift their focus from “past performance” and “assets already owned” to “value that can be created in the future.”
Can This Change the Reality of “No Collateral, No Borrowing”?
The greatest significance of this system lies in the fact that it seeks to place forms of corporate value that have not been adequately recognized in the financial world onto the foundation of lending.
Startups in particular often possess excellent technologies, services, talented personnel, and unique expertise, yet it is uncommon for them to hold large amounts of collateralizable assets such as real estate or equipment. As a result, even when they have strong future prospects, many have had little choice but to rely on equity financing rather than loans. If enterprise value security rights function as intended, they will broaden the financing options available to such companies.
The system is also highly meaningful for SMEs. Longstanding relationships with business partners in the region, the skills of experienced employees, trust built within the local community, and unique sales networks are all important assets that support the continuity of a business, even though they are difficult to measure numerically. If these elements come to be recognized to some extent in financial practice, the system may help alleviate the problem of companies that want to continue operating but cannot proceed with succession because the burden of personal guarantees is too great.
In that sense, this system is not simply about increasing the types of acceptable collateral. Rather, it can be seen as an attempt to prompt the financial sector to reconsider a more fundamental question: what exactly gives a company its value?
What Banks Are Being Asked for Is Not Merely “Screening,” but the Ability to Understand
That said, just because the system has been launched does not mean lending practices will change dramatically overnight. In fact, the real hurdle may only begin here.
Under conventional lending practices, relatively formalized indicators such as the value of collateralized real estate, figures in financial statements, and the presence or absence of guarantees have been given significant weight. Under the enterprise value security right system, however, lenders must assess a business in a broader sense, taking into account factors that are difficult to quantify, such as technological capability, intellectual property, ongoing customer relationships, human capital, sales channels, and brand strength.
This is not simply a matter of adding more items to a checklist. It means that financial institutions must develop the ability to understand a company’s business model, determine how that company creates value, identify where its competitive advantages lie, and assess what kind of growth potential it has for the future. Put differently, what banks are being asked to possess is not merely the ability to read financial data, but the ability to understand the business itself.
What matters here is that such a capability cannot be acquired overnight. It requires accumulated expertise: industry-specific knowledge, the ability to assess intellectual property and technology, a perspective for evaluating the quality of personnel and organizations, and an understanding of regional commercial flows. Even if the system exists in law, its use will not spread unless practice can keep pace. The wait-and-see mood reportedly present in the banking industry likely reflects precisely this difficulty.
The Key to Widespread Adoption Is Not “Can It Be Evaluated?” but “Can It Be Recovered?”
Another point that cannot be overlooked when considering the future of this system is risk management.
Lending does not end with the screening process at the moment a loan is extended. There is also the question of how claims will be preserved and recovered if a company later falls into financial distress. With real estate collateral, valuation and liquidation mechanisms are relatively well established. However, when intangible assets or the value of an entire business are used as collateral, it becomes an extremely difficult issue to determine how that value is to be identified, maintained, and, when necessary, disposed of or transferred.
For example, if a company’s value depends heavily on its team of engineers or its relationships with key customers, merely the emergence of management instability could trigger an outflow of personnel or a contraction in business dealings, thereby rapidly impairing the value of the collateral itself. In other words, a company’s value may appear promising at the time of evaluation, yet not remain intact as expected by the time recovery becomes necessary.
From this perspective, the spread of the system will require more than simply a forward-looking ideal. The accumulation of actual operational know-how and case studies will be indispensable. Only when practical knowledge is shared—such as which industries are well suited to the system, how much monitoring is needed, and how it should be combined with existing lending methods—will financial institutions be able to move forward in earnest.
It Could Become a Gateway to Transforming Japan’s Lending Practices
Even so, this system carries major significance, because it directly addresses issues that have long burdened Japan’s lending practices.
In Japan, it has often been pointed out that dependence on management guarantees and lending practices premised on real estate collateral have acted as obstacles to both entrepreneurial challenge and business succession. Companies seeking to venture into new business areas are often precisely the ones that do not possess tangible assets, while mature asset-holding companies have generally found it easier to borrow. From the standpoint of supplying funds to growth sectors, this structure has not necessarily been rational.
Enterprise value security rights have the potential to change that structure. Of course, not every company will be saved by this system, nor will banks suddenly become willing to take on substantial risk. Even so, the significance of explicitly codifying the idea that collateral need not be limited to land and buildings, and that attention should instead be directed to the value of the business itself, should not be underestimated.
If this system truly takes root, it will change what is evaluated in the world of corporate finance. And if that happens, companies themselves will need to do more than simply present sound financial statements. They will also need to organize and present their strengths—their technology, personnel, customer base, intellectual property, and business model—in a form that can be explained persuasively to financial institutions. The system may ultimately change not only financial institutions, but also the way companies disclose information and manage their businesses.
What We Should Expect Is Not Rapid, Sweeping Adoption, but the Gradual Accumulation of Success Stories
Realistically speaking, I do not believe usage of the system will expand rapidly immediately after its launch. It is only natural for banks to proceed cautiously, since evaluation, monitoring, and recovery all require new forms of practical expertise.
What matters here, however, is not whether the system spreads nationwide all at once. Rather, a more realistic path would be for successful cases to emerge first in specific fields or types of transactions, and then gradually spread throughout the financial industry. For example, the system may first gain traction in areas where it is relatively easy to identify compatibility, such as technology companies with clearly recognizable intellectual property value, or businesses whose customer base stability can be more readily assessed.
In that sense, what will determine the success or failure of this system is not so much the enactment of the law itself, but how many high-quality examples can be created after implementation. If no one uses the system out of fear, it will become hollow in practice. Conversely, if reckless use leads only to conspicuous failures, it may instead produce greater reluctance. What is being tested is whether careful yet meaningful practice can be accumulated.
Conclusion
The launch of the enterprise value security right system is an event that compels Japanese finance to reconsider what it regards as value. If it enables a shift away from lending dependent on real estate and personal guarantees toward an approach that evaluates businesses in a broader sense—including technological capability, intellectual property, human capital, and customer bases—then its significance will be extremely great.
At the same time, there is a difference between a system being established and a system actually being used. Only when many conditions are in place—financial institutions’ evaluative judgment, practical know-how, risk management, and companies’ own ability to communicate information—will this mechanism truly function.
This system is not a magic solution that will instantly transform lending in Japan. However, it has the potential to become a major turning point because it seeks to evaluate, head-on, strengths of companies that have long been difficult to see in the financial world. What deserves attention from here on is not simply that the system has begun, but which companies and which financial institutions will create the first successful cases.