Recently, while surfing the Joi Ito weblog, I stumbled upon a fascinating discussion about personal guarantees for small business loans in Japan.
It turns out that starting a business in Japan can mean more than simply business risk — it can mean risk to life and limb.
An article in the Japan Times highlights the high rate of suicide among Japanese men, and ties it to the practice of banks requiring personal guarantees for business loans. The reasons for the suicides: shame when the business failed, and the need to use life insurance monies to pay off debts so that the banks will not go after relatives and friends who have guaranteed the debts.
Joi Ito, who lives in Japan, says the practice of giving personal guarantees for business loans is widespread. Relatives, friends and relatives of relatives frequently hit you up for a personal guarantee. It is considered socially unacceptable to refuse.
What I find interesting is the stark contrast with U.S. banking practices. In both countries, small business loans are usually accompanied by personal guarantees. But there the commonality stops.
In Japan personal guarantees are regularly sought from those outside the business. In the U.S., on the other hand, personal guarantees tend to be limited to those with an ownership stake in the business.
In Japan the banks are dead serious about enforcing the personal guarantees. If we are to believe the comments left by others on Ito’s weblog, some local Japanese banks even hire gangsters to enforce guarantees. There also appears to be no limit in time or amount to the guarantees.
This banking practice has a chilling effect on entrepreneurship and starting small businesses in Japan. (How many suicides and broken legs does it take to convince someone not to seek a business loan?) According to the Global Entrepreneurship Monitor, Japan ranks at the bottom across the globe in the level of entrepreneurial activity, as shown on this chart:
One of the main reasons cited for the very low entrepreneurial activity in Japan: the banking climate.