1 in 4 SMEs, small business owners say debt burden is overwhelming

One in four small and medium-sized enterprises and small business owners say their current debt burden is overwhelming, a new survey shows. One in five firms also reported experiencing a repayment crisis without falling into actual delinquency.

The Korea Federation of SMEs on Tuesday released results of its survey on financial cost burdens facing small and medium-sized enterprises and small business owners, conducted among 500 SMEs carrying outstanding loans. The survey ran from July 7 to July 15, before the Bank of Korea decided to raise its benchmark interest rate.

Among respondents, 26.4 percent said they felt burdened by their current debt levels, outpacing the 20.4 percent who felt no burden — a gap of 6 percentage points. Among small enterprises and small business owners, 28.1 percent reported feeling the strain, compared with 21.1 percent among medium-sized firms, a difference of 7 percentage points. The findings suggest smaller businesses are more vulnerable to financial cost pressures.

Only 1.8 percent of respondents said they had missed a principal or interest payment in the past year, but 20 percent said they had experienced a repayment crisis without technically falling into delinquency — meaning one in five surveyed firms struggled at some point to meet their obligations. All firms that reported actual delinquency were small enterprises or small business owners. The share of small enterprises and small business owners that had experienced either delinquency or a near-delinquency crisis stood at 24.2 percent, compared with 14.6 percent for medium-sized firms, a gap of 9.6 percentage points.

Among firms feeling the debt burden, the most commonly cited cause was declining sales and deteriorating operating profit, at 67.4 percent. High loan interest rates followed at 37.9 percent, rising raw material prices at 34.8 percent and higher labor costs at 25 percent.

The most common response was cutting costs internally — reducing investment and labor expenses — cited by 58.3 percent of respondents. Some 22 percent said they had no particular measures available. Among small enterprises and small business owners, 25.5 percent said they had no recourse, more than triple the 7.7 percent figure for medium-sized firms.

When asked what policies were most needed going forward, expansion of policy financing topped the list at 58.8 percent, followed by loan maturity extensions and repayment deferrals at 52.2 percent, and reinstatement of high-interest subsidy programs at 43.2 percent.

The survey found that as financial cost burdens grow, businesses are increasingly focused on survival rather than future investment. More than half of firms feeling the debt burden said they were cutting investment and labor costs — a trend that raises concerns about declining capital expenditure and employment if high interest rates and weak domestic demand persist.

"Since declining sales and deteriorating operating profit were identified as the leading causes of debt burden, boosting SMEs' and small business owners' repayment capacity through domestic demand recovery and economic stimulus in the second half of the year is important," said Lee Min-kyung, head of policy coordination at the Korea Federation of SMEs. "With the benchmark interest rate hike likely to increase financial cost burdens further, the financial sector also needs to actively pursue cooperative measures such as loan maturity extensions and repayment deferrals."

Lee added that "the safety-net role of policy financing also needs to be strengthened — through expanded supply of policy financing and liquidity support for vulnerable businesses — to prevent temporary cash shortfalls from turning into delinquency or insolvency."