Struggling SMEs Amid Ultra-High Interest Rates

SME Loan Interest Rates Rise Above 5% for the First Time in 9 Years... "It's Hard to Hold On"
Big Step Continues "Various Funding Support Needed to Prevent Promising SMEs from Insolvent Bankruptcy"

A technician is welding at a small to medium-sized enterprise.
[Photo by Kim Hyunmin / Graphic by Lee Youngwoo]

[Asia Economy Reporters Kim Jong-hwa and Kwak Min-jae] Park Jong-woo (67), who runs an injection mold company producing ultra-thin light guide plates for laptops and tablet PCs, as well as multifunction peripheral products in Hwaseong-si, Gyeonggi Province, visited a bank last week to apply for a 200 million KRW operating fund loan but returned after consultation. "I am currently repaying a 500 million KRW loan taken out at an interest rate in the low 3% range, but the rate has risen to 7%, and I paid 2.92 million KRW in interest last month. They said if I want to borrow more, the interest rate would exceed 8%, so I couldn't make a decision and came back."

The price of special steel used as the mold material has risen about 50% in just one year, and plastic materials have also increased by about 40%, intensifying cost burdens. Last year, the company recorded an operating loss for the first time in 20 years, and a deficit is expected this year as well. Due to unexpectedly high costs, additional operating funds were needed, prompting another loan application. "If I take out a loan at the interest rate the bank demands, the combined monthly payment for existing and new loans would be about 4.3 million KRW. That amount could hire two employees if I had just a little more. I visited two more banks, and some required collateral. I really felt the impact of rising interest rates." A year ago, the interest on a 500 million KRW loan at a 3.2% rate was 1.34 million KRW, but borrowing an additional 200 million KRW now means paying triple the interest. CEO Park said, "Although the interest rate is high, I plan to take the loan. Exports are scheduled for next year, so we can return to profitability. I'm trying to hold on somehow, but it's really tough."

Adding to the difficulties, the Monetary Policy Committee is likely to raise the base interest rate from 3% to 3.5% on the 24th, and there are forecasts that small and medium-sized enterprise (SME) loan interest rates will reach the 6% range. Experts advise that while there is still some capacity to endure, with further rate hikes expected, SMEs may face difficulties in financing after next year, exposing them to bankruptcy risks, and thus government-level measures are necessary.

No Min-seon, a research fellow at the Korea Institute of Startup & Entrepreneurship Development, said, "If marginal companies face bankruptcy risks, it is necessary to strengthen support for business transformation to enable them to rebound without failing." She also emphasized, "It is important to prevent profitable SMEs from going bankrupt by providing various private and government financial supports to innovative companies."

Jung Min-ki (62), who runs a company producing automobile sunroofs, engine covers, and battery covers located in Siheung-si, Gyeonggi Province’s Sihwa Industrial Complex, has recently been struggling with financial difficulties. Sales have dropped about 50% compared to last year, raw material prices have increased about 40%, and operating profits have been negative for three consecutive years. "The global automobile market is gradually recovering, and there is hope to increase production a little, but if next year is even harder as predicted, I really don’t think I can hold on."

CEO Jung took out a 600 million KRW loan six years ago. At that time, the interest rate was 2.9%, but now it has soared past 6%, doubling the monthly interest payment from 1.5 million KRW to 3 million KRW. Labor costs and electricity bills have also risen, doubling monthly expenses compared to a year ago. Earnings have halved, but expenses have doubled. The company’s products are supplied to large corporations that neither raise the delivery price nor maintain the delivery volume, which has nearly halved. Producing more results in losses, but the company hopes to at least maintain the business relationship. If even the clients are lost, the factory will truly have to close.

He is deeply worried about the possibility of further base rate hikes. CEO Jung said, "A bank employee told me it’s better to get a loan as soon as possible, so I plan to apply for a loan at the bank tomorrow. I have no choice but to reduce staff, but I don’t know how to bring it up."

The problem is that the financial burden on SMEs is inevitably going to increase further. Despite the recession, factories must operate even if it means borrowing, but as interest rates continue to rise, the burden intensifies.

Meanwhile, SME loan balances have ballooned like a snowball. It appears that after the COVID-19 crisis and other events, companies exhausted their financial strength and had no choice but to rely on loans. According to the Bank of Korea’s recently released 'Financial Market Trends as of October 2022,' as of the end of September, SME loan balances stood at 948.2 trillion KRW, an increase of 75.2 trillion KRW compared to a year earlier. Compared to December 2019 before COVID-19, this is an increase of 231.5 trillion KRW. Loans to individual business owners, mainly borrowed by self-employed people, also increased by 100 billion KRW to 443.1 trillion KRW.

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