SMEs Driven to 'Dosan Cliff' by COVID-19... Surge in Accounts Receivable Insurance Subscriptions to Prevent Bankruptcy (Comprehensive)

Concerns Over Chain Failures Due to Lack of Funding... Loss Compensation Insurance for Credit Transactions
2,896 Cases Registered Since February, Up 31% YoY

[Asia Economy Reporter Kwon Haeyoung] #A, a small auto parts manufacturing company located in Dalseo-gu, Daegu, was unable to collect accounts receivable after its client B filed for corporate rehabilitation. To make matters worse, the bank demanded repayment of the existing accounts receivable-backed loan (AR loan), pushing A to the brink of bankruptcy in no time. Fortunately, A, which had subscribed to accounts receivable insurance, received compensation of 140 million KRW for the uncollected receivables, repaid the AR loan to the bank, and overcame the risk of default. Having paid about 4 million KRW in insurance premiums, they received over 30 times that amount in compensation. As deliveries to B had increased to over 90% of sales and payment periods had lengthened, A was in a position where they had no choice but to continue deliveries despite delayed payments. Thanks to the accounts receivable insurance, they barely escaped the risk of closing their business and expressed relief.

As concerns over the bankruptcy of small and medium-sized enterprises (SMEs) rise due to the economic downturn caused by the novel coronavirus disease (COVID-19), the number of SMEs subscribing to 'accounts receivable insurance,' which prevents defaults on promissory notes and other receivables, is rapidly increasing.

According to the Korea Credit Guarantee Fund (KODIT) on the 12th, from February this year to the 10th of this month, the number of accounts receivable insurance policies underwritten reached 2,896, a 31% increase compared to the same period last year (2,204). The insured amount was 3.0299 trillion KRW, up 25% from 2.4216 trillion KRW a year earlier.

Accounts receivable insurance is a system that compensates up to 80% of losses incurred when an SME sells goods or services on credit to a client but fails to collect payment due to the buyer’s default. Since 1997, KODIT has supported SMEs through this public insurance program commissioned by the government. Eligible entities include SMEs, mid-sized companies, and cooperatives. Mid-sized companies must have average sales below 300 billion KRW to qualify for insurance.

A KODIT official explained, "Since February, when concerns over the spread of COVID-19 intensified, the subscription to accounts receivable insurance by SMEs has noticeably increased compared to last year. As the domestic and international business environment has worsened, SMEs have sought to establish a safety net to mitigate the risk of losses caused by client defaults."

With the sudden variable of COVID-19 rapidly cooling the domestic and global economies, concerns over the bankruptcy of relatively vulnerable SMEs and self-employed individuals are rising. According to a survey conducted last month by the Korea Federation of SMEs targeting 250 SMEs on the 'Impact and Opinions Regarding the COVID-19 Situation,' 34.4% of SMEs reported being directly affected by the crisis. 43.2% of companies responded that their perceived business conditions had worsened compared to before the COVID-19 outbreak. By industry, 31% of manufacturing companies and 37.9% of service companies reported suffering damage due to COVID-19. As the COVID-19 situation prolongs, the current business environment for SMEs is expected to deteriorate further.

KODIT initially set the annual underwriting scale for accounts receivable insurance at 20 trillion KRW, the same as last year. As SME damages from COVID-19 increased, the underwriting scale was recently expanded by 200 billion KRW to 20.2 trillion KRW. Additionally, KODIT is cooperating with local governments such as Gyeongbuk Province to promote SME subscriptions to accounts receivable insurance and provide premium discount benefits.

Furthermore, last year, related regulations were revised to increase the maximum insurance limit per policyholder from 5 billion KRW to 10 billion KRW, and mid-sized companies with average sales below 300 billion KRW, which were previously ineligible, can now subscribe to the insurance.

A KODIT official stated, "Accounts receivable insurance protects companies from the risks of credit transactions and plays a role in preventing chain bankruptcies among SMEs. We will continue to support SMEs by expanding accounts receivable insurance services through ongoing product development."

This content was produced with the assistance of AI translation services.