Ministry of SMEs Extends Loan Repayment Period to Significantly Reduce Burden on Small Business Owners

Operation of Three Financial Support Measures
Implementation of Conversion Guarantee by Regional Credit Guarantee Foundation
Expansion of Eligible Small Business Debt Refinancing Loans
Enforcement of Revised Policy Fund Repayment Extension System

The loan repayment burden for small business owners will be significantly reduced going forward.

The Ministry of SMEs and Startups announced on the 29th the detailed implementation plan for the "Financial Support Triple Package," a major task of the "Comprehensive Measures for Small Business Owners and Self-Employed" jointly announced with related ministries.

The triple package is a program that greatly alleviates the loan repayment burden of small business owners, consisting of the restructuring of the repayment extension system, the establishment of a conversion guarantee, and the expansion of the refinancing loan support target.

First, through this restructuring, the Ministry of SMEs and Startups will completely abolish the existing repayment extension support eligibility criteria of "direct loan balance of 30 million KRW or more + business operation period of 3 years or more." The support target will be greatly expanded to include all small business owners who have direct loans. However, support is available only if there are no tax delinquencies, loan arrears, applications for debt adjustment under the New Start Fund, or business suspension/closure.

Applications will begin on August 16, and small business owners who have completed the grace period of the policy funds loan and have repaid the principal at least once will be eligible to apply. Therefore, the timing when applications can be made may vary for each small business owner. Upon application, if any one of the four conditions is met?multiple debts, medium-to-low credit, sales decline, or signs of credit score deterioration as judged by the Small Enterprise and Market Service within the past year?a repayment feasibility review will be conducted to extend the repayment period.

Before the restructuring of the repayment extension system, repayment period extensions were supported within 2 to 4 years depending on the loan balance held by the small business owner. However, with this restructuring, repayment period extensions of up to 5 years will be possible regardless of the loan balance held. Additionally, small business owners will be allowed to select the repayment period they wish to extend within the maximum 5-year range.

Considering that the policy funds for small business owners generally have a 2-year grace period and a 3-year repayment period, the principal repayment period can be extended up to 8 years. Accordingly, the monthly principal payment is expected to decrease by up to 62.5%.

For example, a small business owner who borrowed 30 million KRW in policy funds would originally have to pay 830,000 KRW monthly in principal repayment when the repayment period arrives, but if the repayment period is extended by 5 years, the monthly principal repayment would be 310,000 KRW. This means the monthly principal repayment decreases by 520,000 KRW.

Furthermore, the interest rate system applied during the repayment period extension will also be restructured to reduce the interest burden on small business owners who extend their repayment period. Previously, when extending the repayment period, the current policy fund base rate + 0.6%p was applied regardless of the existing loan interest rate, but after restructuring, only 0.2%p will be added to the existing contracted interest rate.

The Ministry of SMEs and Startups plans to supply a 5 trillion KRW scale conversion guarantee starting July 31, 2024. The newly established conversion guarantee is a guarantee that converts existing regional credit guarantees held by small business owners into new guarantees, allowing them to receive new loans from financial institutions to alleviate their repayment burden.

Specifically, when a borrower using a loan with a regional credit guarantee (hereinafter referred to as a guaranteed loan) applies for the conversion guarantee, the existing guaranteed loan is converted into a new guaranteed loan (new guarantee + new financial institution loan), resulting in an additional grace period and an extended repayment period.

This creates a new grace period during which only interest is paid, eliminating the monthly principal repayment burden during that period, and the extended repayment period reduces the monthly repayment amount compared to before.

For example, if a small business owner who received a 30 million KRW guaranteed loan with a 1-year grace period and 4-year installment repayment converts it into a new guaranteed loan with a 1-year grace period and 4-year installment repayment after 2 years through the conversion guarantee, the grace period is extended by 1 year and the remaining repayment period is also extended by 1 year.

Additionally, to reduce the cost burden on small business owners, the Ministry of SMEs and Startups plans to exempt early repayment fees charged when converting to a new guaranteed loan and reduce the calculated guarantee fee rate by 0.2%p for low-credit small business owners.

High-interest loans from the private sector or loans whose maturity extensions are denied can be converted into 10-year installment repayment loans through small business refinancing loans.

The small business refinancing loan is a program that converts high-interest loans of 7% or more and loans with restricted maturity extensions at banks into policy funds with a fixed interest rate of 4.5% and a 10-year installment repayment condition. It was newly established this year with a scale of 500 billion KRW.

Initially, to prevent moral hazard, credit score criteria and loan timing conditions were set somewhat strictly, but considering the increased repayment burden on small business owners due to prolonged high interest rates, the support requirements will be significantly relaxed.

First, the credit score criterion, one of the support requirements, will be raised (NCB 839 points or below → 919 points or below) to provide stronger support for medium-to-low credit borrowers, and the eligible loan period will be expanded by about one year from loans before August 31, 2023, to loans before the announcement date of the measures (July 3, 2024).

Also, considering that many individual business owners cover operating costs with household loans, refinancing targets will include not only business loans but also household loans confirmed for business purposes up to a maximum of 10 million KRW.