A self-employed individual in their 50s, operating a Korean restaurant in Jung-gu, Seoul, took out a personal loan to cover living expenses and insufficient business operating funds. However, due to sluggish domestic demand, customer numbers dwindled, leading to decreased sales while fixed costs such as rent and ingredient expenses continued. Ultimately, they fell behind on loan repayments, damaging their credit score and making it difficult to secure additional loans.
What this individual needs most is immediate cash. They require working capital to sustain their business until sales recover and to repay existing debts. However, financial institutions find it challenging to extend further loans to borrowers who are already in arrears and have low credit scores. This creates a paradox where a lack of funds prevents recovery.
This situation underscores the necessity for policy finance. Under the criteria of private finance, which primarily considers credit scores and delinquency history, even self-employed individuals with potential for recovery may be unable to access funding. The role of policy finance is to provide working capital to borrowers who may lack collateral and credit but can continue their businesses.
However, it is not feasible to uniformly lower the barriers to loans simply because funds are needed. Providing additional funds to self-employed individuals whose business profitability has collapsed may prevent immediate delinquency but could lead to an increase in debt. If policy funds provided to borrowers with low recovery potential become non-performing, the burden will fall back on guarantee institutions and the public sector.
According to data submitted by Park Seong-hoon, a member of the National Assembly from the People Power Party, the cumulative default rate for low-interest loan guarantees for small business owners, implemented from September 2022 to December 2024, reached 26.6% as of July this year. Out of a cumulative new guarantee supply of 1.66 trillion won, defaults occurred on 441.5 billion won.
This figure does not imply that policy finance should be reduced. Rather, it suggests that simply deciding whether to lend money to self-employed individuals is not a solution. It is essential to first determine whether the issue is a temporary cash shortage, excessive repayment burdens, or a situation where losses increase as the business continues.
Self-employed individuals with a viable business foundation but temporarily blocked cash flow need new working capital. For borrowers who generate revenue but face excessive debt burdens, extending loan terms, reducing interest rates, and debt restructuring may be more effective than additional loans. For those unable to continue their businesses, instead of piling on more debt, support for closure and employment or re-establishment should be provided to open new pathways.
To achieve this, the evaluation criteria for policy finance must change. In addition to credit scores and collateral, factors such as revenue flow, operational cash, cost structure, and business sustainability should be assessed. After providing funds, it is crucial to monitor the management status to quickly transition from new loans to debt restructuring or recovery support.
The success of policy finance should not be evaluated solely by the amount of funding or the number of cases supported. It is important to assess whether the self-employed individuals who received support have actually recovered their sales and repayment capabilities, and whether those facing challenges have succeeded in recovery without accumulating more debt.
While it is essential not to push those in dire need of funds out of the financial system, uniformly lending money to everyone is not the answer. Timely provision of necessary funds to recoverable self-employed individuals, debt restructuring for those struggling with debt, and connecting new exit strategies for those unable to continue their businesses are crucial. What is needed in policy finance for self-employed individuals is not more loans, but more accurate diagnosis and support connections.
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.