Practical knowledge for borrowing from a bank: what is looked at, guarantees and public systemsWhen a shop or a company borrows money, what does the bank look at?
When you take out a loan for your business, the financial institution judges the outlook for repayment comprehensively from the numbers in the financial statements and the substance of the business. Public arrangements include the systems guaranteed by credit guarantee associations, loans from the Japan Finance Corporation, and the "Guidelines on guarantees by business owners", which encourage lending that does not rely on the owner's personal guarantee. This article sets out basic knowledge useful in preparing for a loan, following government guidance. The result of an individual assessment differs by financial institution and by case.
- 1. PreparePrepare the financial statements, the use of funds, the repayment plan and the business plan
- 2. ConsultConsult your financial institution, the Japan Finance Corporation, the chamber of commerce and industry and so on
- 3. ApplySubmit the necessary documents and apply (if guaranteed, the credit guarantee association also assesses)
- 4. AssessmentThe financial institution checks the outlook for repayment and so on through interviews and documents
- 5. Contract and disbursementAgree on the terms, sign the contract, and the loan is disbursed
Key points
- Financial institutions generally look comprehensively at repayment capacity (profit and cash movements), financial soundness (the balance between borrowings and equity), the business outlook, the use of the funds and so on
- The credit guarantee system is an arrangement in which a credit guarantee association guarantees a small or medium-sized enterprise's borrowing and pays in its place when repayment is delayed (subrogated repayment). A guarantee fee is charged
- The "Guidelines on guarantees by business owners" (applied from February 2014) are a voluntary set of rules saying that unguaranteed lending or a review of the guarantee can be considered when conditions are met, such as the assets and accounting of the corporation and the owner being separate, the corporation being able to repay from its earning power, and financial information being disclosed in a timely way
- From March 15, 2024, a credit guarantee system began (the business-chosen system with no guarantee by the owner) that lets a business choose not to attach a guarantee by the owner in exchange for a higher guarantee fee rate. The addition is 0.25% or 0.45% depending on the requirements
- At start-up, loans for new businesses from the Japan Finance Corporation and others are an option. The content and terms of the systems change, so check the latest on each agency's guidance
What to do in practice
- Prepare the financial statements (the latest 2 to 3 terms), a list of borrowings and repayments, and an outline of the business plan, so that you can explain the numbers as they are in fact
- Use the free tool "Financial indicator check for financial statements" to check your company's indicators, and "Estimate of the amount you can borrow" to try out a repayment amount that is not a strain
- Check the latest guidance of the credit guarantee association, the Japan Finance Corporation and your financial institution, and consult on whether a guarantee is needed and on its terms
When a company borrows money from a bank, the bank checks "whether it will be repaid properly" using a report card called the financial statements and the outlook for the work ahead. There are also arrangements such as the "credit guarantee association", which pays in place of the borrower if the borrower cannot repay, and the "Japan Finance Corporation", which handles the government's money. If you know before borrowing what will be looked at, it is easier to prepare.
- ○Applies: What the borrowed money will be used for
- ○Applies: How much will be repaid each month, and how
- ○Applies: The numbers in the financial statements are true to the facts and can be explained
- ×Does not apply: Rewriting the numbers to make them look good (must not be done)
Points
- The bank looks at whether the company makes a profit and can repay, and whether the use of the borrowed money is clear
- The "credit guarantee association" pays the bank in place of the company when the company cannot repay (in exchange, the company pays a guarantee fee)
- There are also efforts to spread ways of borrowing that do not count on the president's personal property (lending that does not rely on a guarantee by the business owner)
What the words mean
- Loan (yushi)
- A bank or similar lending money to a company with a promise that it will be repaid
- Credit guarantee association
- A public organization that pays the bank in place of a company when the company cannot repay
- Financial statements
- Documents that sum up a company's results for a year and the state of its money
- Small and Medium Enterprise Agency: Small and Medium Enterprise Agency, Guarantees by business owners (Guidelines on guarantees by business owners)
- Small and Medium Enterprise Agency: Small and Medium Enterprise Agency, Review of the credit supplementation system
- Small and Medium Enterprise Agency: Small and Medium Enterprise Agency, Launch of a credit guarantee system that lets businesses choose not to provide a guarantee by the business owner in exchange for a higher guarantee fee rate
- Small and Medium Enterprise Agency: Japan Finance Corporation, Loans for starting a business
This article summarizes and explains materials published by government agencies and is not advice on any individual case. Rules can change, so for actual procedures and decisions always check the latest original materials and consult professionals such as tax accountants or labor and social security attorneys. English, Simplified Chinese and Traditional Chinese versions are translations prepared from the Japanese articles for convenience. If anything differs, the Japanese text and the original source take precedence.