[SME Funding Squeeze]② Tougher Bank Requirements for SMEs... Over Half of Small Construction Firms Rely on Policy Financing

52.1% of New Funds for Construction Firms Came from Policy Financing
Significantly Exceeding General Bank Loans
81.8% of Construction Companies Using Policy Funds
Relied on Credit Guarantee-Backed Loans

As concerns over the soundness of small and medium-sized enterprise (SME) loans are growing, the funding conditions for small construction firms, which have been heavily affected by the real estate slump and unsold property in provincial areas, are also deteriorating. Last year, more than half of the new funds raised by small construction companies came from policy financing, and the percentage of firms denied new bank loan applications was more than twice that of all SMEs.

According to the financial sector on August 11, the average delinquency rate of SME loans across South Korea's five major banks, based on the simple average of each bank’s fact book data, rose from 0.49% at the end of last year to 0.57% at the end of the first quarter of this year, and to 0.58% at the end of the second quarter. In particular, Woori Bank’s SME loan delinquency rate increased from 0.52% at the end of last year to 0.75% at the end of the second quarter, up by 0.23 percentage points. This is the highest level since the first quarter of 2019, according to Woori Financial Group’s Fact Book.

Among SMEs, construction companies experienced relatively greater difficulty in securing funds. According to the ‘2026 SME Financial Survey’ by the IBK Economic Research Institute, 14.6% of construction companies that applied for new bank loans in 2025 were partially or entirely denied credit. This figure is 2.2 times higher than the 6.5% denial rate for all SMEs.

The most common reasons cited by construction firms for their loan denials were “insufficient collateral” and “insufficient credit rating,” both at 73.8%. This indicates that construction companies face particular difficulty in obtaining bank loans solely on the basis of their own credit or collateral.

The structure of new funding also underscores the construction industry’s heavy reliance on policy financing. Overall, SMEs secured 63.9% of their new funds through general bank loans and only 29.5% through policy financing. By contrast, construction firms sourced 52.1% of their new funding from policy financing, far exceeding the 38.5% obtained through general bank loans.

Among construction companies that used policy funds, 81.8% relied on credit guarantee-backed loans, 20.1 percentage points higher than the 61.7% rate among all SMEs using policy funds.

Credit guarantee-backed loans work by having a guarantee institution such as the Korea Credit Guarantee Fund, the Korea Technology Finance Corporation, or a regional credit guarantee foundation guarantee a company’s loan obligations; banks then provide loans based on this guarantee. If the company is unable to repay, the guarantor institution repays the bank within the agreed limits, effectively compensating for the company’s lack of credit or collateral.

The fact that most SME construction companies utilizing policy funds also relied on credit guarantees highlights the significant role of public guarantees in new funding for the sector. As the business performance and cash flow of construction firms deteriorate, banks are demanding additional collateral or guarantees, leading firms to increasingly depend on policy funds that come with public guarantees.

Financial distress in the construction sector is largely attributable to the prolonged downturn in regional real estate markets and the accumulation of unsold properties after project completion, which have severely weakened the liquidity of small construction companies highly dependent on private housing projects. When sales are delayed, the payment inflow to developers and contractors drops, leading to difficulties in repaying project financing (PF) loans and paying construction costs. When the collection of construction payments is delayed, liquidity pressures spread to specialized construction firms and subcontractors, who must cover material and labor costs up front.

Small construction firms generally have weaker capital and credit standings than large builders, and often lack sufficient assets to serve as collateral. Faced with rising costs due to increases in raw material prices and labor expenses, and now also struggling with unsold properties and delays in project commencement, their profitability and cash flow are at heightened risk. Particularly for companies with a high proportion of regional projects or lower credit ratings, rising delinquency rates are prompting banks to tighten their lending criteria even further, exacerbating the financing challenges they face.

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