A recent survey revealed that a staggering 60% of self-employed individuals have resorted to multiple loans to sustain their businesses during this challenging period of high interest rates. (Image courtesy of Yonhap)
SEOUL, Jan. 3 (Korea Bizwire) – Small business owners in South Korea are grappling with a burgeoning financial crisis, compounded by the aftermath of the COVID-19 pandemic, rising interest rates, and soaring inflation. As repayment deadlines for accumulated debts loom, there’s an increasing concern over potential defaults, leading to a spike in bankruptcies among these entrepreneurs.
A recent survey revealed that a staggering 60% of self-employed individuals have resorted to multiple loans to sustain their businesses during this challenging period of high interest rates. This places them in a precarious position as ‘multiple debtors’, the most vulnerable category in these times.
In Seoul’s Mokdong Kkabi Market, a traditional market, a 60-year-old shop owner running a kimchi and side-dish store expressed his concerns, saying, “Since November, we’ve been in the red, so I’m using my savings to pay employee wages.” His efforts to mitigate costs included using a small heater to save on heating bills.
Another vendor, a 50-year-old who sells snacks, said, “I had to raise the price of a serving of tteokbokki by about 500 won, but the increase in the prices of cooking oil and flour is much higher, so profits continue to decrease.” He voiced his worries about the economic downturn expected this year.
The challenges are compounded by the ‘triple highs’ crisis — high interest rates, high inflation, and high exchange rates. Small business owners are struggling in an environment where consumers are hesitant to spend, while costs keep rising. A clothing store owner in the market for 16 years said, “In a recession, people don’t buy clothes. Even if they do, they tend to buy online where it’s cheaper.”
A meat restaurant owner in Gwanak District is also struggling with loan repayments amidst poor sales. “It’s hard to pay back the principal and interest when there’s no income,” he commented.
In response to these hardships, the ‘Yellow Umbrella’ retirement pension scheme for small businesses anticipates its highest ever payouts due to the increase in business closures. As of August of last year, the payout amount for the Yellow Umbrella’s closure indemnity had increased by 40.2% compared to a year earlier, reaching a record high of 894.8 billion won.
Economists are raising alarms about the potential impacts of this financial instability on the broader economy. Lee Jung-hee, a professor of economics at Chung-Ang University, noted the seriousness of the situation, saying, “The government needs to accurately grasp the current loan status and repayment ability of these small business owners and self-employed individuals to prepare necessary measures.”
The increasing delinquency rates among self-employed individuals with multiple loans are a particular concern. A recent report from the Bank of Korea shows that the loan balance for self-employed individuals was 1,052.6 trillion won at the end of the third quarter last year, with the delinquency rate rising from 0.69% at the end of 2022 to 1.24%.
Noh Min-sun, a researcher at the Korea Small Business Institute, noted that high growth would be difficult for the time being, with interest rates unlikely to drop soon, adding that “small and medium enterprises are likely to face a challenging year ahead.”
Noh stressed the need for longer-term solutions, stating, “The financial risks for small and medium-sized businesses and sole proprietors are increasing, and short-term, patchwork responses have their limitations.”
M. H. Lee (mhlee@koreabizwire.com)
