資金調達
What Is Insured ABL? — Receivables-Backed Financing and the Policy Terms Lenders Check
How trade credit insurance is combined with receivables-backed lending (ABL): the differences between ABL, factoring and securitization, Japan's public guarantee scheme, the policy terms lenders check, how advance rates are thought about, and the assignment process, based on public material from the FSA, the SME Agency, the Ministry of Justice and credit insurers.
ABL (asset-based lending) is a way of borrowing from a financial institution against inventory, receivables and other assets rather than land or buildings. Because it opens up financing to companies with little real estate to pledge, Japan's Financial Services Agency (FSA) has encouraged its use.
When receivables are the collateral, their value depends on whether buyers pay on time. One approach is to insure the receivables with trade credit insurance, so that losses from a buyer's insolvency or late payment are covered. This article sets out the basics and what lenders check in the policy, based on public material from Japanese government bodies and credit insurers.
ABL, factoring and securitization compared
| ABL | Factoring (purchase) | Securitization | |
|---|---|---|---|
| Nature of the contract | A loan secured on receivables and other assets | A sale of receivables | Receivables transferred to a special purpose vehicle, funded by investors |
| Assets | Receivables plus movable assets such as inventory | Mainly individual receivables | A large pool of receivables |
| Focus of the review | The borrower's credit and the collateral value | The buyer's (debtor's) credit | The quality and diversification of the pool as a whole |
| Typical size | Accessible to mid-sized companies and SMEs | Available for small amounts | Requires a certain minimum balance |
In ABL, the lender assesses not only the borrower's ability to repay but also how collectible the pledged receivables are. In factoring and securitization, where the receivables are bought, who bears the risk of a buyer not paying depends on the terms of the assignment and whether there is recourse. In every case, trade credit insurance can be combined as protection against buyer non-payment.
Guarantee factoring, which guarantees the buyer's payment without buying the receivable, is not a financing tool but protection against bad debt. Its differences from trade credit insurance are set out in trade credit insurance vs. guarantee factoring.
Public scheme: the current-asset-backed loan guarantee
Japan also has a public guarantee scheme for loans secured on receivables or inventory. According to the Small and Medium Enterprise Agency, under the Current-Asset-Backed Loan Guarantee Scheme a credit guarantee corporation guarantees loans that SMEs obtain from financial institutions against receivables or inventory. The guarantee is capped at JPY 200 million and covers 80%. When receivables are pledged, the assignment is perfected against third parties by registration of the assignment, notice to the buyer, or the buyer's consent.
This scheme guarantees the borrower's repayment. Trade credit insurance covers non-collection of the pledged receivables themselves, so their roles differ. Depending on the size of the loan and the receivables involved, consider using one or the other, or both.
What changes when trade credit insurance is added
Trade credit insurance covers a set percentage of losses from a buyer's insolvency or default. Insured receivables are supported not only by the buyer's credit but also by the insurer's ability to pay, which can make them easier for lenders to accept as collateral. As a result, the range of eligible receivables or the advance rate may change.
However, how a lender values collateral and on what terms it lends is up to each lender. Adding insurance does not guarantee better loan terms.
How much the insurance actually returns
According to credit insurers, the claim is calculated as the lower of the loss on the insured receivable and the credit limit, multiplied by a pre-set insured percentage. When considering collateral value, the yardstick is the amount this calculation returns, not the face value of the receivables.
| Buyer | Balance | Credit limit | Insured percentage | Maximum recoverable from insurance |
|---|---|---|---|---|
| Company A | JPY 30 million | JPY 30 million | 90% | JPY 27 million |
| Company B | JPY 20 million | JPY 10 million | 90% | JPY 9 million |
| Company C | JPY 5 million | No limit | — | JPY 0 |
* An illustration. In practice, deductibles, a maximum liability and other terms also apply.
In this example the total balance is JPY 55 million, but the maximum recoverable from insurance is JPY 36 million. Buyers whose limit is below their balance, or who have no limit, reduce the insured portion. When the aim is financing, the first thing to check is whether the buyers on the pledged receivables have limits that match their balances.
Policy terms lenders check
Whether the insurance works as support for the collateral depends on the policy terms. Lenders mainly check the following.
| Point | What is checked |
|---|---|
| Who receives the claim payment | Whether the claim proceeds will go to repay the loan, e.g. through a pledge over the right to claim, or by naming the lender as loss payee |
| Covered buyers and credit limits | Whether the buyers on the pledged receivables have credit limits from the insurer. Amounts above the limit are not covered, so the balance is compared with the limit |
| Insured percentage and deductible | The share of a loss the insurance returns and the part the policyholder bears; this directly affects the advance rate |
| Waiting period | For late payment, the time until the loss is recognized and the claim is paid, and how cash flow will be covered in the meantime |
| Maximum liability | Whether the cap on total claims during the policy period is sufficient relative to the loan |
| Limit changes | Credit insurers keep monitoring buyers during the policy period and revise limits. How the lender will be informed if a limit is reduced or cancelled |
| When claims are not paid | Disputes with the buyer over product quality, failure to meet policy obligations, shipments after a limit is cancelled, etc. |
The last point, when claims are not paid, is the one most often overlooked. Trade credit insurance assumes the policyholder meets certain conditions, such as notifying overdue payments, managing limits and stopping shipments to overdue buyers. If the borrower does not meet them, the lender cannot receive the claim payment either. Lenders therefore also check the borrower's credit management and administration.
The waiting period also needs attention. Credit insurers give examples where non-payment continuing for six months or more after the due date is covered as protracted default. If a buyer stops paying without entering formal insolvency proceedings, it can take a considerable time before the claim is paid, and this should be built into the funding plan.
Assignment of receivables and anti-assignment clauses
When receivables are pledged or assigned, the contract with the buyer may contain a clause restricting assignment. Under Japan's amended Civil Code, in force since April 2020, an assignment is valid even if there is such a clause. However, the relationship with the buyer and the contractual treatment still need care, and in practice each case must be checked.
To perfect an assignment against third parties, the Legal Affairs Bureau offers registration of receivables assignments. It is used when many receivables are pledged together. Registration perfects the assignment against third parties without notifying each buyer individually, so collateral can be set up with consideration for buyer relationships.
How lenders use credit insurance
In ABL, lenders can use the trade credit insurance on the receivables to protect their position, for example by taking a pledge over the right to claim under the policy.
Alternatively, financial companies that buy receivables through factoring may arrange credit insurance themselves.
Who is the insured, assignment of or security over the right to claim, and the insurer's consent all need to be considered according to the structure of the transaction.
How to proceed
- Organize the receivables: list each buyer's balance, payment terms and any past overdue payments.
- Design the policy terms: design covered buyers, credit limits, insured percentage and deductible to fit the financing purpose.
- Coordinate with the lender: agree with the insurer the conditions the lender requires, such as a pledge or loss payee.
- Confirm administration: decide who handles overdue notifications and limit management, and when.
- Review at renewal: the policy is usually renewed annually. If the loan term and policy period do not match, check at each renewal that the renewed terms still meet the loan agreement's assumptions.
The broker's role
Credit Hills designs and arranges trade credit insurance suited to the financing purpose, and aligns the policy terms with the conditions the lender requires. Where appropriate we introduce partner lenders, but we do not lend or buy receivables ourselves.
See insurance-backed financing →
Frequently asked questions
Q. Will insurance improve our loan terms?
A. It may, but we cannot promise it. Collateral valuation and loan terms depend on the lender's credit review.
Q. We already have trade credit insurance. Can we use it for financing?
A. Possibly. However, a pledge over the right to claim requires the insurer's approval, and you need to check that your current terms meet the lender's requirements.
Q. Will our buyers find out that we have pledged their receivables?
A. If the assignment is perfected by registration, individual notice to buyers is not required. Practice varies with the lender's policy and your contracts with buyers, however, so each case needs to be checked.
Q. We want to know more about trade credit insurance itself.
A. What is trade credit insurance explains how cover works and the types of policy.
References (in Japanese)
- FSA — What is ABL (asset-based lending)
- FSA — On active use of ABL (2013)
- Small and Medium Enterprise Agency — Current-Asset-Backed Loan Guarantee Scheme
- Ministry of Justice — Act partially amending the Civil Code (law of obligations)
- Ministry of Justice — Registration of receivables assignments
- Atradius — Credit insurance FAQ (claim calculation, protracted default)