[Self-Employed Financial Report]② 2 out of 10 Use Secondary Financial Institutions... 12% Suffer from High-Interest Tears

22% of Small Business Owners Have Loans from Secondary Financial Institutions
Half Face High Interest Rates in the 10% Range... Rushing to Repay Due to Burden

[Asia Economy Reporter Minwoo Lee] Kim Beomsik (43), who runs a general goods store in Seongdong-gu, Seoul, has recently been tossing and turning at night more often. Since talking with a bank employee as his loan maturity approached, he has felt like sitting on pins and needles day and night. The interest rate on the 3%-range 'Small Business Second Financial Support Loan' he borrowed from Woori Bank doubled overnight to the 6% range starting early this year. The unsecured loan he took from Industrial Bank of Korea felt even more daunting. A recent conversation with a bank employee explained that the interest rate, which was in the 3% range, would rise to over 8%.

Although he urgently borrowed money from several acquaintances to repay the loan, Kim still feels heavy-hearted. He said, "The economy is bad, sales are not coming in, and only the loan interest is soaring, so it really feels like my blood is drying up," adding, "There are other business owners who borrowed 'quick cash' from places other than banks, but I feel like a day passes just worrying."

With loan interest rates rising, the noose of debt is tightening further around self-employed business owners. They rely on government guarantees and banks, but in the harsh economy, customers are reducing their visits, leading to a vicious cycle where urgent funds are needed again and again.

One in Five Uses Secondary Financial Institutions... Half Face High Interest Rates in the 10% Range

According to the '2022 Financial Status Report on Small Business Owners Using Guarantees' by the Korea Credit Guarantee Fund on the 2nd, among 3,101 small business owners who used guaranteed loans from the Credit Guarantee Fund, 22.8% procured funds from secondary financial institutions such as savings banks, card companies, and capital companies. This means one in five sought out secondary financial institutions. Among them, 43% procured funds at high interest rates exceeding 12% per annum. More than half received loans with interest rates in the 10% range. Only about 23% borrowed money from secondary financial institutions at interest rates below 6%.

Seven out of 100 self-employed individuals (6.9%) answered that they had delayed principal repayment or interest payments in the past year. The reasons for delinquency (multiple responses allowed) included 'increased burden of interest or principal repayment' (57.7%), which was cited almost as much as 'decreased sales' (62.7%). 'Cash flow difficulties' (23.9%) was also one of the main causes.

Loan interest rates for small and medium-sized enterprises, including small business owners, have risen sharply. Starting from the fourth quarter of last year, they surpassed household loan interest rates. According to the Bank of Korea Economic Statistics System on the 2nd, the interest rate on new loans to small and medium-sized enterprises by domestic deposit banks approached 6%. In December last year, it was 5.76%, higher than the household loan rate of 5.60%. The increase was also steep. Compared to a year ago, the SME loan interest rate rose by 2.39 percentage points, while household loan rates increased by 1.94 percentage points.

"Repay First"... Self-Employed Business Owners Putting Out Urgent Fires

As high interest rates persist, self-employed business owners seem to be putting out urgent fires first. According to the financial sector, the outstanding balance of personal business loans at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) has been increasing throughout last year but started to decline again from October last year. It rose from 299.7215 trillion won in 2021 to 315.2679 trillion won in September last year, but then shifted to a downward trend as loan interest rates rapidly increased. As of the 30th of last month, it was 310.3896 trillion won, decreasing by nearly 5 trillion won in about four months.

A representative from a commercial bank explained, "Usually, self-employed people prepare reserve funds, but with the sharp rise in interest rates in the fourth quarter of last year, they felt the burden and seem to be repaying first," adding, "To use additional policy funds in the future, there is also the purpose of avoiding overlapping benefits, and with the rapid increase in interest burdens, they are putting out urgent fires first rather than taking on new loans."