Warnings are emerging that small businesses and self-employed individuals are reaching their breaking point. According to the Bank of Korea, the national check default rate in June hit 0.32%, the highest level recorded in over a year since May 2025. This figure represents an eightfold increase compared to December 2025, when the rate was just 0.04%. The rising default rate indicates that small and medium-sized enterprises (SMEs) and self-employed individuals are struggling to cope with worsening cash flow and increasing financial costs.
The ongoing high interest rates, rising raw material prices, currency instability, and domestic economic stagnation are exacerbating the management environment for SMEs. While large corporations can absorb shocks due to their ability to secure funding and high credit ratings, SMEs and self-employed individuals are not in the same position. Heavily reliant on bank loans, they bear the full brunt of interest rate hikes and increased spreads. This impact is far more severe for SMEs and self-employed individuals than for large corporations. While large firms can weather crises, most SMEs depend on bank loans, facing rising interest burdens while their sales stagnate or decline, leading to situations where financial costs exceed operating profits.
In a survey conducted by the Korea Federation of Small and Medium Businesses from July 7 to 15, 26.4% of the 500 SMEs and self-employed respondents reported feeling burdened by their current debt. Among them, 6.2% indicated that their situation was 'very difficult to endure,' while 20.2% said it was 'somewhat difficult to endure.'
Notably, 28.1% of small businesses and self-employed individuals reported feeling debt pressure, which is 7 percentage points higher than the 21.1% of medium-sized enterprises. The burden of financial costs was more pronounced among those with lower sales. When asked about their experience with loan repayment delinquencies in the past year, 1.8% reported having actually defaulted, while 20.0% indicated they had faced a risk of default without actually defaulting. This suggests that one in five surveyed businesses is struggling with repayment, even if it hasn't led to actual defaults.
More concerning is that this crisis is not limited to individual businesses. Increased financial costs can lead to reduced capital investment and research and development, delayed payments to suppliers, and a chain reaction of defaults among trading partners. The bankruptcy of a single SME can trigger a ripple effect impacting the local economy, suppliers, and financial institutions. The surge in check default rates serves as a leading indicator of the potential spread of corporate credit risk throughout the real economy, which should not be taken lightly.
The gap between businesses that can secure funding and those that cannot is widening. As economic uncertainty rises, financial institutions are compelled to focus their lending on high-quality borrowers, leaving SMEs with weak collateral and credit increasingly unable to secure necessary funds in a timely manner. If businesses close not due to a lack of competitiveness but because of temporary liquidity shortages, it represents a loss not just for those businesses but for the entire national economy.
In this context, it is crucial to enhance the role of policy financing and guarantees to ensure that businesses experiencing temporary liquidity crises can continue their operations. Tailored financial support should be strengthened to prevent companies with technological capabilities and growth potential from abandoning investment and employment due to high financial costs.
SMEs and self-employed individuals are the capillaries of our economy. If they falter, employment, consumption, and even the foundation of the national economy will inevitably be shaken. The sharp rise in check default rates is a structural warning reflecting the urgent reality faced by businesses that can no longer endure. It is imperative to implement proactive financial stability measures and effective support now, rather than waiting for the crisis to escalate, to create an environment where SMEs and self-employed individuals can recover. We must not forget that economic recovery begins with the survival of SMEs and self-employed individuals, not just the performance of large corporations.
* This article has been translated by AI.
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