[Self-Employed Closure Report②] "To Survive Even If You Fail"... 4 Out of 10 Start a New Business Again

Korea Credit Guarantee Foundation Central Association's '2022 First Half Survey on Business Closure Status of Guaranteed Companies'
40% of Closed Businesses Have Restarted or Are Preparing to Restart
Average Startup Cost Already Exceeds 100 Million Won
"Repeated Closure and Restart Increases Debt Problems"

[Asia Economy Reporters Song Seung-seop and Shim Na-young] Kim Sang-cheol (34, pseudonym), who operated a book cafe in Seongnam-si, Gyeonggi Province, plans to close his business on the 30th of next month and reopen in Seoul as a franchise cafe selling Americano coffee for around 1,000 won. Despite shuttering the store due to mounting losses, he believed that self-employment was the only way to make a living. Kim said, "I barely covered my card payments this month, but I can't even sleep at night," adding, "I plan to reopen the store with government support by October."

It has been revealed that many self-employed individuals close their businesses only to start new ones again. Some close their original stores because they have no other means to sustain their livelihood and either reopen in the same industry or re-enter self-employment hoping for government business support funds. Experts point out that this is exacerbating the debt problems among self-employed people.

Half of Closed Business Owners Say, "Even If I Fail, I'll Start Again"

According to the ‘2022 First Half Guarantee Support Enterprises Closure Status Survey’ released on the 26th by the Korea Credit Guarantee Fund Central Association (telephone survey of 821 closed businesses conducted from April 21 to May 18), 4 out of 10 small business owners who closed their businesses have either ‘already restarted’ (24.1%) or are ‘preparing to restart’ (15.5%). Among those who said they are ‘recharging’ (12.9%), 53.4% responded that they plan to ‘restart a business’ in the future. This means about half of the closed small business owners are jumping into re-entrepreneurship. Only 5.5% said they had ‘retired from economic activities.’

The report cites the low entry barriers as the reason domestic small business owners easily consider restarting. Since no special personnel, skills, or permits are required, restarting a business is the easiest way to repay immediate debts and sustain a livelihood. Among respondents, 68.2% cited ‘livelihood maintenance’ as the reason for considering re-entrepreneurship. Only about 20.9% said it was because they believed they could overcome failure from closure and succeed.

[Image source=Yonhap News]

The biggest problem for self-employed people who restart businesses is the so-called ‘revolving door re-entrepreneurship,’ where they repeatedly close and open businesses without any innovation. More than half (53.5%) choose the same industry as before closure. The main reason for this choice, selected by 52.2%, was ‘because they have experience, skills, or expertise.’ The second most common reason, at 36.2%, was ‘because no special preparation was needed.’ Only 7.2% of small business owners chose the same industry because ‘high profits were expected.’

The report expresses concern that the confidence in accumulated experience or skills may actually be overconfidence. Researchers Bae Jin-sung and Lee Yeon-su from the Korea Credit Guarantee Fund Central Association said, "(Small business owners) receive consulting from experts on reasons for closure but fail to utilize this in re-entrepreneurship success factors," adding, "It is necessary to prevent the cycle of closing and reopening businesses based solely on vague experience in the same industry."

Sloppy Re-Entrepreneurship Worsens Household Debt Problems

While self-employed individuals keep cycling through closure and re-entrepreneurship, startup costs are soaring. According to surveys by the Korea Credit Guarantee Fund Central Association and the Small Enterprise and Market Service, the average startup cost rose from 90 million won in 2020 to 118 million won in just one year. The report warns, "Due to the high investment costs of startups, many cases close without recovering costs," adding, "If this pattern continues, it will lead to increased household and corporate debt, causing social problems."

There is also concern that business closure itself deepens household poverty and debt issues. Among self-employed people who closed their businesses, 71.1% cited ‘household financial difficulties’ as the most challenging aspect during closure. Additionally, 22.7% said ‘excessive debt made it difficult to resume normal economic activities.’

As self-employed individuals hope for financial support for closure and re-entrepreneurship, measures are needed. Financial support for re-entrepreneurs or those who closed businesses is very limited compared to the necessary costs. The Seoul Foundation’s ‘Business Closure and Restart Support Program’ offers up to 2 million won for store restoration. The ‘Hope Return Package’ provides about 2.5 million won maximum for store demolition costs. Despite this, most financial support policies for self-employed people, such as loss compensation, do not apply to those who have closed or suspended their businesses.

There is also an argument that the purpose of supporting self-employed people should shift from ‘livelihood assistance’ to ‘growth.’ Nam Yoon-hyung of the Korea Small and Medium Business Institute said, "Until now, government support has mostly focused on stabilizing management for livelihood-type self-employed people," adding, "Support for professionalizing self-employment is necessary."

There is advice that increasing quality jobs is the way to help people escape the self-employment trap. Oh Jung-geun, professor of economics at Konkuk University, said, "No matter how necessary support is, it is like pouring water into a bottomless pit," adding, "There is no sharp alternative other than the business climate improving and stable income-providing jobs continuously emerging in each region."