6 out of 10 Companies "Reduce Loans and Rely on Internal Funds Due to High Interest Rates"

KCCI Survey on Financing Status of Top 1000 Manufacturing Companies
Financing Sources: 63% Internal Reserves, 33.7% Financial Borrowing
Preference for Stability over Investment... Working Capital (72%) > Facility Investment (50.7%)

#Manufacturer A is spending about 20% of its operating profit on interest payments. This is because loan interest rates have soared to the 6% range. The company stated, "We are short on working capital and cannot even consider facility investments or new business ventures," adding, "We are focusing on maintaining the current state."

It has been revealed that the number of companies financing their operations with internal reserves, like Company A, has surged. The Korea Chamber of Commerce and Industry (KCCI) announced on the 21st the results of a survey on the financing status of 300 out of the top 1,000 manufacturing companies by sales.

The survey showed that the primary financing method for companies was 'internal reserves' (63%). External financing methods such as borrowing from financial institutions (33.7%) and direct financing markets like corporate bonds and stock issuance (2.3%) had lower response rates than internal financing.

In a survey conducted last August targeting 300 large and medium-sized enterprises, the response rate for 'borrowing from financial institutions' (48.2%) was higher than that for 'internal reserves' (27.9%), but this time internal financing was higher.

KCCI explained that the decreased reliance on external financing by companies is due to "the full impact of high interest rates."

Three out of four companies responded that they are either already repaying debt or have principal and interest repayment periods due within this year. Companies currently repaying interest or principal on high-interest bank loans accounted for 53.3%. Those with principal and interest repayment periods due this year accounted for 19.3%. Combined, this totals 72.6%.

The difficulties in financing and fund management were ranked as follows: 'Increase in financial costs due to high interest rates' (69.3%), 'Increase in operational fund demand' (25%), 'Strengthened bank loan screening' (22.7%), 'Repayment burden due to maturity' (10%), and 'Downgrade of corporate credit rating' (9.7%).

Export containers are being loaded onto a ship at Busan North Port. Photo by Jinhyung Kang aymsdream@

Companies have been reducing their loans. According to the Bank of Korea, loan amounts were 103 trillion won in June 2022, 99 trillion won in January last year, 85 trillion won in June last year, and 76 trillion won in January this year.

The average interest rate on borrowings has increased. It rose from 3.77% in Q4 2022 to 4.41% in Q1 last year and 6.52% in Q3 last year. The interest coverage ratio, which indicates a company's ability to repay debt, plummeted from about 14 times in Q3 2022 to 1.26 times in Q4 2022. It slightly increased to 2.29 times in Q3 last year.

Companies spent more of their raised funds on labor and other production and operating expenses than on facility investments. The response rates for the main purposes of financing were 'working capital demand such as labor costs' (72%), 'facility investment such as factory equipment' (50.7%), 'securing cash liquidity' (27.7%), and 'debt repayment including principal and interest' (12%).

KCCI pointed out that the demand for external financing has also decreased due to the difficult environment for companies to actively invest amid economic contraction. The private sector facility investment growth rate recorded 11% in Q4 2022, 8.2% in Q1 last year, 5% in Q2, and -6.5% in Q3. The growth rate of facility loan increases also showed a downward trend.

A KCCI official said, "With significant domestic and international uncertainties and increased financing costs due to high interest rates, it appears that companies are prioritizing covering funds with internal reserves or focusing on working capital financing rather than aggressively raising funds."

Expectations for the resolution of high interest rates varied: second half of this year (38.3%), first half of next year (25.3%), first half of this year (15.7%), second half of next year (11.3%), and after the year following next (9.4%).

Kim Hyun-soo, head of the Economic Policy Team at KCCI, said, "At a point more than a year into enduring the high interest rate trend, companies with poor performance are likely reaching their limits due to accumulated interest burdens," adding, "It is necessary to prepare support measures to alleviate corporate financial cost burdens until the base interest rate begins to decrease significantly."

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