Small Business Financial Measures: Is Overlapping Support with Existing Systems Possible?

[Asia Economy Reporter Song Hwajeong] Financial authorities are steadily announcing financial support measures for self-employed and small business owners. It is important to carefully examine the eligibility, scale, and methods of support, as well as to check how these differ from existing programs and whether duplicate support can be received.

According to the Financial Services Commission on the 11th, the refinancing program for self-employed and small business owners, whose detailed plan was announced the previous day, targets small business owners who have taken out business loans with interest rates exceeding 7%, allowing them to switch to low-interest bank loans with rates below 6.5%. Borrowers who have received support through the refinancing program of the Small Enterprise and Market Service (SEMAS) under the Ministry of SMEs and Startups can also receive additional support for the remaining amount within the limit, excluding the amount already refinanced. The limit for the Financial Services Commission’s low-interest refinancing program is KRW 50 million for sole proprietors and KRW 100 million for small corporations. Considering this, a sole proprietor who refinanced KRW 30 million through the SEMAS program can refinance an additional KRW 20 million, and a small corporation can refinance up to KRW 70 million additionally.

While both programs support refinancing for small business owners at low interest rates, they differ in terms of handling institutions, limits, and interest rates. The Financial Services Commission’s refinancing program is scheduled to accept applications from the end of next month, whereas the Ministry of SMEs and Startups’ refinancing program has been in effect since the 29th of last month. The Financial Services Commission’s program targets sole proprietors and small corporations, while the Ministry’s program targets low-credit small business owners (NICE credit score of 744 or below). The Financial Services Commission’s refinancing program allows refinancing of loans obtained from existing banks, credit finance companies, savings banks, mutual finance, and insurance companies, but the Ministry’s refinancing program only covers loans from savings banks and mutual finance. Regarding new loan handling institutions, the Financial Services Commission has confirmed participation from 14 banks including Kookmin, KEB Hana, Shinhan, Woori, NH Nonghyup, Suhyup, SC, Busan, Kyongnam, Daegu, Gwangju, Jeonbuk, and Jeju banks, with participation of internet-only banks and non-bank sectors still under discussion. The SEMAS program involves two banks: Shinhan and Hana.

The loan limits are KRW 50 million for individuals and KRW 100 million for corporations under the Financial Services Commission’s program, and KRW 30 million for both individuals and corporations under SEMAS. Both programs have a repayment period of five years, with a two-year grace period followed by three years of installment repayment, but the applied interest rates differ. The Financial Services Commission applies a fixed interest rate of up to 5.5% for the first two years, and from years three to five, the agreed rate (bank bond AAA 1-year rate + 2.0 percentage points) is applied as the interest rate ceiling. The guarantee fee is fixed at 1% per annum. Accordingly, the maximum rate is 6.5%, and the actual rate applied varies depending on the borrower’s creditworthiness. The Ministry of SMEs and Startups applies differentiated interest rates ranging from 5.5% to 7.0% depending on creditworthiness.

The New Start Fund, which the Financial Services Commission plans to announce next week, adjusts the debts of vulnerable borrowers and serves the same role as the Workout program of the Credit Counseling and Recovery Service (CCRS). However, the difference is that the CCRS Workout targets individuals, whereas the New Start Fund targets sole proprietors. Kwon Daeyoung, Director of the Financial Policy Bureau at the Financial Services Commission, explained, "The New Start Fund is benchmarked on the CCRS Workout and does not deviate significantly from its framework. Since the CCRS only allows workouts for individual loans without assets, and does not cover sole proprietor loans, the New Start Fund was created as a specialized program for sole proprietors who have physical infrastructure."

Additionally, while the CCRS debt adjustment program requires banks to bear the full loss from principal reductions, the New Start Fund covers principal reduction losses from funds allocated through supplementary budgets, which is another difference.