Back To Top

Self-employed exposed to greater debt risks

Concern is being raised that the problem of debt incurred by self-employed businesses in the country is much more severe than has been depicted by official figures.

A newspaper report last week said a recent survey by the local financial authorities revealed the country’s self-employed people held a combined debt of 650 trillion won ($573.1 billion) as of the end of last year, exceeding the Bank of Korea’s earlier tally at 480.2 trillion won.

According to another report Sunday, data provided by a domestic credit-rating firm to the Financial Supervisory Service put the amount of debt owed by the self-employed as of end-2016 at 520 trillion won.

An empty shop (Yonhap)
An empty shop (Yonhap)

FSS officials say detailed figures on self-employed businesses’ borrowings have yet to be fixed.

The central bank’s tally, which only includes the debt of self-employed borrowers of business loans and those of household loans who have received business loans, has already rung alarm bells on the growing severity of the problem.

The outstanding loans of 480.2 trillion won extended to self-employed people at the end of last year marked a 42 percent jump from 318.8 trillion won four years earlier.

In recent months, self-employed businesses’ borrowings have increased at a faster rate than total household debt, which has reached nearly 1,360 trillion won.

Furthermore, many self-employed people who have difficulties borrowing from banks -- while struggling to stay afloat amid slumping consumption and intensifying competition -- turn to nonbanking institutions that demand higher interest rates.

“The livelihoods of most self-employed people would be in danger if interest rates are raised further while business conditions remain tough,” said Choi Seung-jae, head of an association of local self-employed individuals.

According to Statistics Korea, the number of self-employed people in the country amounted to 5.63 million in the final quarter of last year, up 140,000 from a year earlier. It marked the largest increase in more than four years.

Over the cited period, the number of employees in the manufacturing sector decreased by 115,000. The manufacturing workforce has continued to shrink since July last year.

These figures show the trend that a growing number of Koreans are being compelled to start their own businesses, whether they are laid-off, retired workers unprepared for the later part of their lives or young job seekers frustrated with the tight labor market.

Self-employed businesses accounted for 25.9 percent of the country’s employment in 2015, far above the 16.2 percent average for 34 members of the Organization for Economic Cooperation and Development in 2013.

Amid a decline in consumption spending, overheated competition has forced many self-employed people to close their businesses within just a few years of opening restaurants, accommodations, repair shops and mom and pop stores.

According to data from the National Tax Service, nearly 23 percent of restaurants that opened in 2015 were shut down within a year. Throughout 2015, 1.06 million individuals started a self-employed business while 739,000 others closed their businesses.

One in 5 self-employed businesses earned less than 1 million won per month, and more than half saw their annual sales fall below 46 million won.

The growing possibility of an interest rate hike is heightening worries that many heavily-indebted self-employed businesses would go bankrupt down the road.

The Bank of Korea has held its benchmark rate at a record low of 1.25 percent for more than a year. But BOK head Lee Ju-yeol suggested earlier this month the central bank might begin tightening its monetary policy if the economy continues to show signs of recovery.

Mainly due to an increase in exports and construction investment, Asia’s fourth-largest economy grew 1.1 percent in the January-March period of this year, the highest in six quarters.

Lee’s remarks were seen as reflecting his concerns about rising household debt and a possible reversal of rates with the US. The US Federal Reserve raised its key policy rate on June 14 by a quarter point to a range between 1 and 1.25 percent with a long-term goal of increasing it up to 3 percent by 2019.

A rate hike is set to increase the debt repayment burden of households in the country, with the household debt-to-disposable income ratio standing at 153.3 percent in the first quarter of 2017, up 8.5 percentage points from a year earlier.

But the impact may be felt most acutely by self-employed businesses on the brink of bankruptcy.

A BOK report released in January suggested a 0.1 percentage point rise in interest rates would heighten the possibility of a self-employed business closing within a year by 10.6 percent for the dining and lodging sector, 7.5 percent for repair and other individual services and 7 percent for wholesale and retail.

According to Statistics Korea, the average debt owed by a self-employed household amounted to 113 million won as of March last year, far above the 77 million won for a wage earner household.

Financial authorities plan to announce measures to curb self-employed people’s debts in August as part of a broader range of plans to cope with the household debt problem.

Financial regulators hint that work is under way to strengthen support for self-employed people, including increasing income and welfare benefits, along with measures to place tighter restrictions on loans to them.

“It is necessary to forge a socioeconomic foundation to ensure the sustainable growth of self-employed businesses,” said Choi.

Many small business owners call for the government to rethink its plan to raise the hourly minimum wage from the current 6,470 won to 10,000 won over the coming three years, which they say would push them over the cliff.

Some economists also note that a meaningful policy would be to prevent laid-off waged workers from drifting into unsustainable self-employed business by increasing quality jobs in the service sector and nurturing more competitive small companies and innovative startups.

By Kim Kyung-ho(

Korea Herald Youtube