[Q&A] Low-Interest Refinancing for Small Business Owners, Only Available for Business Loans

Conversion of Business Loans with Interest Rates Above 7% to Fixed-Rate Loans up to 6.5% Based on Banking Sector Standards
Personal Loans Excluded Due to Difficulty in Confirming Business Use

[Asia Economy Reporter Song Hwajeong] According to the refinancing program for self-employed and small business owners introduced by financial authorities, self-employed individuals and small business owners will be able to convert high-interest business loans with interest rates above 7% into fixed-rate loans capped at 6.5% (including guarantee fees) based on banking sector standards. The refinancing target is limited to business loans and does not include personal loans.

On the 10th, the Financial Services Commission summarized the details of the refinancing program for self-employed and small business owners in a Q&A format.

Why was the supply scale of the refinancing program estimated at 8.5 trillion KRW?

The supply scale of this refinancing program was estimated at 8.5 trillion KRW, considering the current status of high-interest loans in the financial sector and the scale of COVID-19 damages. High-interest loans with an annual interest rate of 7% or more used by self-employed and small business owners in banks and non-bank sectors amount to approximately 21.9 trillion KRW (488,000 cases), and about 40% of self-employed and small business owners are expected to have been affected by COVID-19.

Why was the high-interest rate threshold set at 7%?

The threshold was set considering the policy intent to reduce the repayment burden on vulnerable self-employed and small business owners and the interest rates on low-credit loans in the banking sector. The average interest rate on unsecured loans for relatively low-credit individual business owners in the banking sector is around 7%.

What debts are excluded from the refinancing target?

This refinancing program principally targets business loans (both unsecured and secured) to support the business normalization of self-employed and small business owners who have suffered from COVID-19. Therefore, loans for home or passenger car purchases, card loans or cash services, loans that are difficult to classify as business-purpose loans, or loans whose nature makes refinancing inappropriate are excluded from the refinancing target even if they were treated as business loans. However, loans related to commercial vehicles such as freight trucks and construction machinery (including installment loans) will be included in the refinancing target because their business purpose is clear, even if they were initially treated as household loans.

Self-employed and small business owners often use high-interest personal loans; shouldn't these be included in the refinancing target?

It is true that self-employed and small business owners sometimes use personal loans for business purposes in addition to business loans. However, unlike business loans where the loan purpose such as facility or operating funds is verified, it is generally difficult to confirm whether personal loans were used for personal purposes like home or car purchases or for business purposes, so they were not included in the target. Nevertheless, personal loans related to commercial vehicles such as freight trucks and construction machinery are clearly for business purposes and are included in the refinancing target.

What about prepayment penalties on existing loans?

This refinancing program aims to reduce the financial burden on self-employed and small business owners who had no choice but to use high-interest loans from non-bank sectors due to difficulties caused by COVID-19. Prepayment penalties could be an obstacle for self-employed and small business owners applying for low-interest refinancing. Discussions are underway across all financial sectors, especially focusing on non-bank sectors where loans to self-employed and small business owners have significantly increased, to minimize prepayment penalty burdens. Details on whether prepayment penalties apply by financial company will be announced in September.

What are the differences from the Small Enterprise and Market Service (SEMAS) refinancing program, and is overlapping support possible?

To minimize blind spots in support for self-employed and small business owners, the program will broadly set support targets, limits, and participating institutions.

Considering the reduction of financial burdens for self-employed individuals affected by COVID-19 and concerns about fairness due to overlapping support, additional refinancing can be received within the borrower-specific limit (50 million KRW for individuals, 100 million KRW for corporate small businesses) excluding the amount refinanced through SEMAS. For example, an individual business owner who refinanced 30 million KRW through SEMAS can receive up to 20 million KRW additionally, and a corporate small business can receive up to 70 million KRW additionally.