Pushed to their limit, S. Korean small business owners' use of private lenders soars 72% from last year

Struggling amid the protracted COVID-19 pandemic, small business owners are turning increasingly to non-bank lenders to stay afloat

A fallen sign reading “closed for the day”  (Yonhap News)

“You can’t get loans anymore from the banking sector, so I’m looking into non-banking companies,” explained the proprietor of a Seoul pub in a telephone conversation Thursday with the Hankyoreh.

The proprietor, whose surname is Lee, had almost no debt associated with the establishment before the COVID-19 pandemic struck. But restrictions imposed on operating hours since last year have sent sales plummeting by nearly 80%, and Lee has relied on various loans that are just enough to cover fixed costs.

“As the COVID-19 situation has gone on for over a year and a half, self-employed small business owners are reaching the limits of their capabilities even to take out loans,” Lee said.

Many of them have already turned to money lending businesses, and even private lenders.

One garment wholesaler surnamed Kim who works in Seoul’s Dongdaemun neighborhood has seen monthly sales crash to around 1 million won — down from 20 million to 30 million won before the virus. It’s a drop of more than 90%, but since Kim has to pay upfront for items, the wholesaler has resorted not just to bank loans but also additional loans from non-banking sources.

Around 30 million of Kim’s 70 million won in loans was borrowed from savings banks, insurance companies, money lending businesses, and private lenders.

“The interest on the loans is more than 20%,” Kim told the Hankyoreh.

“Even so, the other struggling self-employed small business owners I know have been asking me for information about money lending businesses and private lenders.”

Strapped for funds as the pandemic drags on, self-employed small business operators have been rapidly turning to non-bank lenders.

Through the office of Justice Party lawmaker Jang Hye-young, the Hankyoreh gained access to the Bank of Korea (BOK) database on household debt. The figures showed self-employed small businesses owners with a collective bank loan balance of 550.6 trillion won (US$461 billion) during the first quarter, up by 16.2% from a year earlier.

During the same period, self-employed small business owners had a collective non-bank loan balance of 281 trillion won (US$235 billion) — up 24.4% from a year earlier. Compared with the year before, loans were up by 27% for mutual savings banks, 37.8% for insurance companies, and 71.8% for miscellaneous lenders — a category that includes private money lending businesses.

Self-employed small business owners have a steady need for funds, and with reduced sales and lending limits ruling out bank borrowing, many are now turning to high-interest non-bank loans.

It’s a vicious cycle where operators unable to use banks have resorted instead to non-bank sources, which further damages their credit until they have no recourse besides money lending businesses and private lenders.

The category of “self-employed loans” in the BOK household debt database includes the sum of household loans and business loans for individual borrowers listed as having sole-proprietor loans. While the household loan category may also include borrowing for asset investment, the recent economic conditions facing small businesses suggest that more of the loans are for business funds.

In the case of non-bank loans, mutual finance companies such as agricultural cooperatives, credit unions, and fishery cooperatives had a balance of 205.4 trillion won (US$171.9 billion), up by 20.9% from the year before.

For credit card and specialized credit finance business loans, the balance stood at 22.4 trillion won (US$18.75 billion), an increase of 16.1% over the past year.

The balance for mutual savings banks was up by 27% to 19.7 trillion won (US$16.4 billion), while the balance of insurance company loans rose by 37.8% to 11.8 trillion won (US$9.8 billion).

At 21.9 trillion won (US$18 billion), the balance for miscellaneous loans — including loans from private money lending businesses — was up by no less than 71.8% from the year before. There has also been a rise in the use of private lenders and daily installment loans, which are not reflected in government statistics.

The protracted struggle with COVID-19 has created a situation where small business operators are forced into loans on top of loans. An increasing number of them are maxing out their credit limits as they are forced into further debt to provide the funds to carry on.

“I’m taking out loans to survive,” Lee, the pub owner, said. “But I don’t know whether I’ll even be able to pay back all of these debts once the pandemic is over.”

By Jun Seul-gi, staff reporter

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