[Financial Insider] "Guaranteeing up to 300 Million for 'Diligent Failures,' We Must Support Their Comeback"

Kang Hyun-gu, Head of Corporate Improvement Department at Korea Credit Guarantee Fund
"Re-startup companies have much higher survival rates"
"Guarantee screening even checks restroom cleanliness"
Support for re-challenge: 221 companies and 33.6 billion KRW from January to September

Kang Hyun-gu, Manager of Corporate Improvement Department, Korea Credit Guarantee Fund. Photo by Huh Young-han younghan@

Our country has been particularly harsh on failure. Once someone starts a business and fails, they are stigmatized and find it difficult to recover. Even though the atmosphere has become more accepting of failure than in the past, the reality is that a business owner who has just had their debt forgiven and tries to start a new business will often return empty-handed from the bank. Recognizing this issue, the Korea Credit Guarantee Fund (hereafter KODIT) has restored the right for those who have failed to stand up again through the 'Rechallenge Support Program.' "We must help 'diligent failures' to make a comeback," says Kang Hyun-gu, head of the Corporate Improvement Department at KODIT.

- Why was the Rechallenge Support Program created?

▲ When small business owners fail to repay loans, KODIT makes payments to the banks on their behalf. This is called subrogation payment. Afterward, the owners become credit delinquents and find it difficult to start a business again. Even if they file for bankruptcy, there are many restrictions on obtaining new loans. During their first startup, not only banks but also parents and friends help, but after one failure, their livelihood becomes difficult for several years. Most people who bring business plans to KODIT for a rechallenge are individuals undergoing personal rehabilitation. KODIT’s goal is to help 'diligent failures.' Those who embezzle money or fail to pay their suppliers are not helped. KODIT’s idea is to prevent good technology possessed by diligent business owners from being wasted.

- How do you identify diligent failures?

▲ We conduct evaluations. When someone applies for rechallenge support, we check whether they made maximum repayment efforts during their previous business and whether their relationships with suppliers were properly settled. When we conduct on-site investigations, we first check the mailbox for notices of overdue electricity bills or taxes before going up to the office. When reviewing the company’s list of suppliers, there is usually a company that deals with KODIT. Just one phone call to the representatives of those suppliers can reveal past behavior. We are trained to check everything from employee morale to even whether the restrooms are clean. Some people who failed in business and had KODIT pay the bank on their behalf are now repaying KODIT in installments. For those who want to start a new business, a system was created in January this year to provide new guarantees. If they have repaid at least three times and have no other credit delinquencies, they can receive support.

- Who are the support targets, and how much guarantee is provided?

▲ KODIT’s basic guarantee rate is 80%. However, banks are reluctant to bear the burden for rechallenges. Therefore, KODIT provides guarantees of almost 90-95%. For general branches, the maximum rechallenge guarantee amount is up to 300 million KRW. If there is a business plan, creditworthiness, and growth potential, an appropriate amount must be supported to prevent re-default. If a business needs 300 million KRW but KODIT only guarantees 100 million KRW, there is no way to raise the remaining 200 million KRW. If funds do not come in on time, the business cannot operate, and the 100 million KRW support becomes meaningless.

Kang Hyun-gu, Manager of Corporate Improvement Department, Korea Credit Guarantee Fund. Photo by Huh Young-han younghan@

The support targets are divided into three categories. The first stage is for owners who receive support immediately after a failure occurs. They are helped to recover by repaying the amount KODIT paid to the bank on their behalf after business failure. Suppose Mr. A failed to repay a 100 million KRW guarantee from KODIT, and KODIT made a subrogation payment. The debtor must repay 100 million KRW to KODIT, but since they have no money, KODIT issues a new guarantee for that 100 million KRW. After helping with recovery, Mr. A can repay in installments. The second stage is to help those who diligently repay KODIT’s subrogation amount. New funding guarantees are provided to those who have made three or more installment payments. The third stage is to support new funding for those who have completed rehabilitation procedures or received bankruptcy discharge.

- Are there any successful comeback cases?

▲ There is a business owner who operated a machine tool manufacturing company since 1995. During the Asian financial crisis, the company went bankrupt due to the collapse of a client and inability to recover funds. Afterward, he got a job and repaid his debts but eventually filed for bankruptcy in court and received debt forgiveness in 2009. Having the skills to make a comeback, he started a company three years ago, but due to the debt forgiveness record, it was difficult to borrow money from banks. Fortunately, he received a 90 million KRW loan guarantee from KODIT, and based on this, his business achieved sales of 1.48 billion KRW last year.

There is also a female business owner who ran a women's clothing manufacturing business until eight years ago but closed it due to declining profitability and has been repaying KODIT debts in installments. Originally interested in cooking, she made a rechallenge in 2021 by starting a Korean traditional set meal supply business. Her cooking skills led to a growing number of clients. She needed operating funds and knocked on bank doors but received no response. After appealing to KODIT, she learned that since she was diligently repaying past KODIT debts, she could receive funding necessary for her comeback. This company recorded sales of 2.149 billion KRW in the first half of this year alone.

- There are many concerns about increasing default rates.

▲ According to Statistics Korea’s 2021 survey, the survival rate of re-startups is much higher. The 5-year survival rate of re-startup companies was 73.3%, much higher than the 29.2% for all startup companies. This is thanks to the experience of those who have re-started. The scale of the Rechallenge Support Program is also increasing. From January to September this year, 33.6 billion KRW in new guarantees were provided to 221 companies. At this pace, it will surpass last year’s guarantee performance (277 companies, 38 billion KRW). Compared to 2018 before COVID-19 (190 companies, 19.4 billion KRW), the guarantee amount has nearly doubled. Although the default rate is increasing, KODIT must take the lead especially when the economy is difficult. In times of crisis, KODIT is the only savior for small business owners.

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