As high interest rates and economic sluggishness persist, small business investment sentiment is cooling. Companies are increasingly postponing capital investments due to rising funding burdens and declining sales and orders.
According to the financial sector on July 23, the balance of asset-backed loans from the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) stood at 785.6 billion won at the end of the first quarter of this year, a decrease of 11.2% from 885 billion won in the same period last year. This marks a continuous decline since reaching 1.043 trillion won in the fourth quarter of 2023. In contrast, other types of secured loans, such as those backed by real estate, securities, and deposits, have recently shown an upward trend.
Asset-backed loans are financial products that allow businesses to borrow funds using machinery, equipment, raw materials, and inventory as collateral. These loans are primarily utilized by small businesses that lack sufficient real estate to secure funding for production facilities or operational capital.
The decline in asset-backed loans is seen by the financial sector as a signal of reduced demand for facility funding among small businesses. Typically, an increase in capital investment leads to a rise in loans secured by machinery and equipment. However, recent economic uncertainties and high financing costs have led more companies to delay their investment plans.
Business sentiment remains bleak. According to the Korea Federation of Small and Medium Enterprises, the Small Business Health Index (SBHI) for July fell by 1.4 points to 78.2. A reading below the baseline of 100 indicates that more businesses view the economic outlook negatively than positively.
Small businesses cite poor sales, rising raw material prices, and intensified competition as their main operational challenges. Additionally, the ongoing monetary tightening has increased funding costs, further diminishing their capacity to invest in new facilities.
In fact, the growth rate of small business sales last year was 3.1%, down 1.1 percentage points from the previous year. Although the interest coverage ratio showed slight improvement, it remains in negative territory, indicating that many businesses are unable to cover interest expenses with their operating income.
With weakened profitability, struggling companies are forced to prioritize using their cash flow to cover existing loan interest and operating expenses. This reduces their ability to acquire new equipment or expand production capacity, leading to a further decline in demand for asset-backed loans.
A banking sector official stated, “In a situation where sales and new orders are sluggish, businesses see little need to expand production facilities. The combination of high interest rates, domestic sluggishness, and exchange rate pressures is causing more small businesses to delay importing equipment from abroad.”
* This article has been translated by AI.
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