Debt burdens push self-employed to brink

A prolonged economic slump, compounded by the impact of conflict in the Middle East, is pushing many self-employed workers in South Korea to the brink. A growing number are relying on debt to stay afloat, but tighter lending standards are making it harder to secure credit. At the same time, some business owners have been found to misuse loans intended for operations to buy high-end apartments and other real estate.

As of the end of last year, about 3.35 million self-employed borrowers had loans from domestic financial institutions. Roughly half were multiple debtors, borrowing from three or more lenders. Their combined debt totaled 684 trillion won, accounting for 60 percent of all loans to individual business owners. The figures point to a worsening cycle in which struggling entrepreneurs take on new debt simply to repay existing loans.

Financial strain is intensifying. The number of self-employed borrowers who fell into delinquency after missing principal and interest payments for more than three months rose to 150,000 at the end of last year, up 9 percent from a year earlier. The increase was particularly sharp among those aged 60 and older, where delinquencies climbed 22 percent, far exceeding the pace among younger groups. Older business owners often face greater difficulty shifting industries or restructuring, making recovery more challenging.

Analysts say more proactive lending is needed for small business owners who remain viable but are struggling through temporary setbacks. Without timely access to credit, otherwise sustainable businesses risk collapsing under short-term pressure.

At the same time, misuse of business loans remains a serious concern. Funds that should go to small business owners in urgent need of working capital have in some cases been diverted into property purchases. Financial authorities have only recently begun reviewing whether business loans issued since 2021 were used for their intended purposes. In the second half of last year alone, 58.8 billion won in loans was found to have been misused.

Even if the government and financial institutions expand lending, the effort will have limited impact if funds flow to borrowers with little chance of recovery or are diverted to unrelated uses. This underscores the need for stricter oversight and tougher penalties for fraudulent borrowing.

Authorities and lenders should also move quickly to adopt more advanced credit evaluation systems that can better identify small and medium-sized enterprises with strong growth potential, even if they lack collateral or have low credit ratings. Viable businesses should not be forced to shut down simply because they cannot secure financing during a temporary downturn.