AI to monitor 250,000 small businesses for early signs of crisis, government says

The government plans to build an AI-powered system to detect early warning signs of financial distress among 250,000 small and medium-sized enterprises nationwide, aiming to help struggling firms recover or pivot to new businesses before a crisis takes hold.

The Ministry of SMEs and Startups announced the plan Wednesday at a joint ministerial meeting of the emergency economic task force and the economic and industrial competitiveness council. The package, developed with related ministries, bundles early crisis detection, structural improvement, business transition and financial support into a single framework.

Small and medium-sized enterprises have faced deepening difficulties amid slowing growth and deteriorating profitability. The share of so-called marginal firms — those with an interest coverage ratio below 1 for three consecutive years — rose from 6.5 percent in 2020 to 7.9 percent in 2022 and 8.8 percent in 2024, meaning a growing number of companies cannot cover their interest payments from operating profit alone.

An analysis of 110,000 incorporated SMEs whose financial data the ministry could access found that 55,000 were either in crisis or showing warning signs in terms of growth or finances. Among them, 39.3 percent were classified as growth-crisis firms with a three-year average sales growth rate below zero, while 25.5 percent were financial-crisis firms with an interest coverage ratio below 1. Companies facing both problems simultaneously accounted for 14.8 percent.

However, 45 percent of the 9,700 firms classified as marginal were still posting sales growth, leading the ministry to conclude that timely structural improvements could restore many of them to financial health. The government said it would build a new re-leap support framework to detect distress early, identify firms with strong recovery potential and provide tailored assistance based on the type of crisis each company faces.

As a first step, the government will expand the pool of companies monitored for early distress signals by the Korea SMEs and Startups Agency from 60,000 to 250,000 — covering all eligible SMEs among the roughly 390,000 small and medium-sized businesses, excluding sectors barred from receiving loans. An AI-based crisis alert system will be built to detect and flag both growth and financial warning signs.

The system will analyze not only financial and credit data but also unstructured data such as news, industry trends and market shifts. It will assess risk at the level of individual companies as well as by sector and region to identify potential crises early. Based on the analysis, each firm will be assigned a crisis index score in one of four tiers: normal, Caution, pre-alert or alert. Companies rated pre-alert or above will receive notifications via text message and social media, along with information on available support programs.

The ministry will conduct comprehensive assessments of firms that trigger crisis alerts, selecting those with strong growth prospects and recovery potential for intensive support. Depending on each company's circumstances, assistance will range from consulting on management improvement and business transition plans to loans, R&D support and debt restructuring referrals.

Support for financially distressed firms will also be strengthened. The screening process for structural improvement assistance will be revamped to focus on recovery potential and growth prospects. Firms that faithfully carry out their management improvement plans will benefit from a simplified loan evaluation process and preferential lending terms. To encourage greater participation from the financial sector, the weighting of SME debt restructuring will be reflected in the "mutual finance index" set to be introduced in the second half of this year.

Support will also be expanded for companies with viable recovery prospects. Firms that use the Pre-ARS mechanism — a court-mediated adjustment process available before formal rehabilitation proceedings are filed — will receive assistance covering everything from drafting debt restructuring proposals to accounting and tax advisory services and negotiations with creditors.

The government will actively support business transitions for growth-crisis firms. On top of the existing six new business categories, the national strategic industries under the "5-pole, 3-special" growth engine initiative and key regional industries will be added as priority support targets. The performance management approach — which previously judged only whether a business transition succeeded or failed — will be replaced with a milestone-based system that provides differentiated support according to results. Companies that demonstrate strong achievement and growth potential will be designated as "leading transition firms" and linked to a jump-up program for further growth support.

In addition, the government plans to introduce a "joint business transition model" that links the pivot of partner SMEs to new ventures being pursued by large and mid-sized companies, with the aim of strengthening competitiveness across the entire supply chain.

Regulatory improvements are also planned. Going forward, business transitions will be recognized to include not only changes in industry sector but also spin-offs, mergers and acquisitions, and joint venture formations. Companies approved for a new business transition will see the permitted stay period for skilled foreign workers on E-7 visas extended from three years to up to five. Regulatory changes will also be pursued to allow firms whose new investment exceeds the scale of their existing business to qualify for regional investment subsidies.

The package marks a shift away from the previous approach — in which policy funds were provided or restructuring initiated only after a company had already fallen into arrears or a liquidity crisis — toward using AI to catch early signals such as slowing growth and weakening profitability and respond proactively. The government said it would concentrate policy resources on firms with genuine recovery and growth potential rather than applying uniform support, particularly given the substantial number of companies classified as marginal despite still growing their sales due to heavy interest burdens.

"We will focus our policy capacity and resources on helping SMEs with growth potential overcome their difficulties through structural improvement and business transitions, and secure new engines of growth," said Noh Yong-seok, first vice minister of SMEs and Startups. "We will build a re-leap ecosystem for small businesses where innovation and challenge continue."