Record High Small Business Loans: The Need for Debt Management

Recently, the amount of loans taken by small business owners from financial institutions has reached an all-time high, raising concerns about the need for effective debt management.

Recently, the amount of loans taken by small business owners from financial institutions has reached an all-time high, raising concerns about the need for effective debt management. The rise in self-employed loans, combined with increasing delinquency rates, suggests the possibility of future financial strain. This article examines the causes of the surge in small business loans, the current debt situation, and strategies for efficient debt management.

As of the second quarter of 2024, the total loan balance for self-employed individuals reached 1,119 trillion KRW, marking a record high. This is an increase of 3.6 trillion KRW from the previous quarter, reflecting the continued rise in self-employed loans, which face fewer regulatory restrictions compared to household loans.

With household debt growth limited by stricter regulations, many are turning to small business loans, which are subject to less stringent oversight. These loans are calculated based on the total income of the self-employed person, including both business profits and wages. However, like household loans, many of these loans are granted without a thorough assessment of the borrower’s repayment capacity, increasing the risk of defaults in the future.

Particularly concerning is the growing number of long-term delinquents. As of the second quarter, 135,000 self-employed borrowers had been delinquent for over 90 days, an increase of 42,000 from a year ago. Additionally, the number of multi-loan borrowers, those with loans from three or more financial institutions, continues to rise, with outstanding debt already exceeding 20 trillion KRW. This indicates a qualitative deterioration of self-employed loans and poses a potential risk to the overall financial system.

Experts argue that stricter regulations on small business loans are needed to address these issues. The introduction of LTI (Loan-to-Income) regulations would allow for more systematic management of loan limits, while financial institutions should conduct more thorough assessments of borrowers' repayment capacities. Furthermore, ensuring transparent loan evaluations and preventing the misuse of business loans for household purposes are essential.

The continued rise in small business loans is increasing the financial burden on the self-employed, with the growing delinquency rates signaling potential future financial problems. To prevent further deterioration, it is crucial for the government and financial institutions to strengthen debt management measures and regulations. Ensuring stable economic activity for small business owners requires careful loan management and targeted support policies.