[SMEs Facing Cash Crunch]① 6 out of 10 Companies Struggle with Funding... Private Loans Triple

Capital Fulfillment Rate at 81.8%... Less Than Half Secured Full Amount
Interest Burden Grows as Lending Rates Rise
'Recession-Type Loans' Sought for Operating Funds Over Investments

Last year, 6 out of 10 small and medium-sized enterprises (SMEs) were unable to secure all the funding they needed. Even when they managed to get loans from banks, interest rates themselves had risen, and more companies turned to private lenders, exacerbating the overall funding crunch. Although the government has pushed for “productive finance” and sought to expand funding supply, analysis indicates that capital is increasingly concentrated among healthy companies, leaving vulnerable businesses facing even tighter liquidity.

Only 44% of SMEs Secured All Necessary Funds... Proportion Using Private Loans Triples

According to the “2026 Survey on the Financial Status of SMEs” released by the IBK Economic Research Institute on August 11, a survey of 4,500 SMEs with annual sales of at least 500 million won showed that companies raising new external funds last year secured a total of 55.9216 trillion won—only 81.8% of the funds actually needed. This funding sufficiency rate fell to 81.8% from 89.1% (90.1969 trillion won) in 2024, a decrease of 7.3 percentage points in just one year.

The number of companies able to secure all the funds they needed also dropped sharply. The proportion of companies reporting that they raised 100% of required funds plunged from 65% in 2024 to 44.2% last year, a decrease of 20.8 percentage points. Although the proportion of respondents who said bank borrowing conditions improved rose from 13.1% in 2024 to 18.4% last year, more than half of SMEs still endured the year without fully securing necessary capital.

More companies also relied on funds outside the banking system. Last year, the proportion of new funds sourced from private lenders such as loan sharks, private finance companies, relatives, and acquaintances reached 3.9%—nearly triple the 1.4% reported for 2024. A total of 94.3% of companies using private loans cited “because borrowing was possible” as the main reason. Another 37.8% said they needed urgent cash. For many firms unable to obtain funds through institutional finance, short-term funding needs have shifted toward private loans.

Even after qualifying for bank loans, interest burdens increased. The average interest rate on new secured loans for SMEs rose from 4.29% in 2024 to 4.5% last year, while the rate on unsecured credit loans increased from 4.96% to 5.24% over the same period. The burden was heavier for smaller companies: the average rates for small enterprises stood at 4.54% for secured loans and 5.3% for credit loans—higher than those for medium-sized firms (4.33% and 4.94%, respectively).

Rising financial costs were also reflected in rising delinquency rates. At the end of the second quarter this year, the delinquency rate for SME loans at Korea’s four major commercial banks—KB Kookmin, Shinhan, Hana, and Woori—reached 0.55%, the highest since the end of the first quarter of 2017 (0.59%), marking a nine-year and three-month high. A commercial bank official noted, “As the economy slows, SME business and financial conditions are worsening overall, and delinquency rates are rising. As credit ratings of firms with deteriorating finances fall, loan interest rates rise, and with market rates also climbing recently, the burden of funding has become even heavier.”

“Survival Loans” Outpace Investment... Demand for Funding Set to Shrink Amid Sluggish Sales

Even funds SMEs struggled to borrow from banks last year were used primarily for working capital to sustain day-to-day operations, rather than investment for the future. The dominant use of new loans last year was for payment of procurement costs (79.1%). This was followed by payroll (28%) and repayment of principal and interest on existing debt (25.8%). In contrast, facility investment accounted for just 20.8%. Rather than expanding their factories, companies focused on paying suppliers, wages, and repaying old debts—indicating the prevalence of so-called “downturn loans.”

Companies also expected lower demand for future funding. Those predicting an increase in capital requirements the following year dropped from 14.9% in 2024 to just 6.6% last year—a record low. Among firms forecasting a decrease in funding demand, 86.6% cited “declining sales” as the reason. Only 5.8% pointed to “increased internal funds due to sales growth,” and a mere 2.4% cited “lower financial costs due to principal repayment.” This suggests that with the sluggish economy reducing sales, overall demand for funds to invest and expand operations is shrinking.

The greater concern is that the business environment going forward is expected to remain difficult. In a situation where economic recovery is concentrated among a few industries and companies such as semiconductors (a “K-shaped” polarization), and with the possibility of interest rate hikes in both Korea and the U.S., market lending rates may climb further. Weak-capacity SMEs could be pushed to the brink by mounting interest repayment burdens. Anxiety over future business prospects has become especially pronounced. The proportion of firms expecting management conditions to improve next year rose by 5.7 percentage points from the previous year, reaching 18.2% compared to 12.5% previously. However, those anticipating deterioration surged by 10.9 percentage points to 25.7% from 14.8% in the prior survey. While the number of companies hoping for economic recovery increased, the ranks of those fearing worsening conditions swelled even more rapidly.

Kang Kyunghoon, Professor of Business Administration at Dongguk University, said, “As economic recovery is concentrated in a handful of sectors and firms, and with the risk of rising interest burdens, it will not be easy for SMEs’ funding conditions to improve anytime soon. There is a need to strengthen policy-based financial support and create additional incentives to encourage banks to actively increase SME lending.”

This content was produced with the assistance of AI translation services.