SMEs in Crisis Due to COVID-19... Surge in Accounts Receivable Insurance Subscriptions Preventing Bankruptcies

Concerns Over Chain Failures Due to Lack of Funding
Loss Compensation Insurance for Credit Transactions
2,896 Policies Subscribed This Month, Up 31% YoY

[Asia Economy Reporter Kwon Haeyoung] Since the outbreak of the novel coronavirus infection (COVID-19), the number of subscriptions to 'accounts receivable insurance,' which compensates for losses incurred during credit transactions by small and medium-sized enterprises (SMEs), has surged. This is interpreted as a desperate measure chosen to preemptively block bankruptcies as SMEs, which have many small-scale clients and lack financial strength, face an increased risk of chain insolvency due to COVID-19.

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

Accounts receivable insurance compensates up to 80% of the loss incurred when an SME sells goods or services on credit to a client but fails to collect payment due to the buyer's default. It is a public insurance system supported by the government through the Korea Credit Guarantee Fund since 1997. The insurance is available to SMEs, mid-sized enterprises, and cooperatives, with mid-sized enterprises eligible only if their average sales are below 300 billion won.

A representative from the Korea Credit Guarantee Fund explained, "Since February, when concerns about 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 become more challenging, SMEs have sought to establish a safety net to prevent losses caused by client defaults."

As the domestic and global economy rapidly cools due to the unexpected variable of COVID-19, concerns over bankruptcies among 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 'Status and Opinions on Damage to SMEs Related to the Novel Coronavirus Situation,' 34.4% of SMEs responded that they have been directly impacted by the situation. 43.2% of companies reported a worsened business sentiment 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 conditions for SMEs are expected to have further deteriorated.

Initially, the Korea Credit Guarantee Fund set the annual scale of accounts receivable insurance underwriting at 20 trillion won, the same as last year. However, as SME damages due to COVID-19 increased, the underwriting scale was recently expanded by 200 billion won to 20.2 trillion won. The Fund is collaborating with local governments such as Gyeongbuk Province to promote SME subscriptions to accounts receivable insurance and also offers premium discount benefits.

Last year, related regulations were revised to increase the maximum insurance limit per policyholder from 5 billion won to 10 billion won. Mid-sized enterprises that were previously ineligible can now subscribe to insurance if their average sales are below 300 billion won.

A representative from the Korea Credit Guarantee Fund stated, "Accounts receivable insurance protects companies from the risks of credit transactions and plays a role in safeguarding SMEs from the risk of chain bankruptcies. We will continue to expand accounts receivable insurance services through ongoing product development to support SMEs."

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