Small Business Operating Margin Falls Year-on-Year for Two Consecutive Quarters... Loan Delinquencies Increase

Korea Credit Data Small Business Trend Report

Profit Margin Down 0.92 Percentage Points Year-over-Year

Profitability Worsens in Half of the 16 Regions Nationwide

Sole Proprietor Loan Delinquencies Rise for Second Straight Quarter

The nationwide profit margin for small business owners declined by about 1 percentage point year-over-year for two consecutive quarters, while loan delinquencies increased during the same period. Although sales among small business owners rose, profitability decreased and delinquencies continued to grow, creating a vicious cycle.

On September 8, Korea Credit Data announced the release of its “Small Business Trend Report,” which analyzed the second quarter (April to June) operational status of small businesses across the country. Korea Credit Data compiled the report using information from its own small business management solution “CashNote,” which is used by approximately 2.3 million businesses nationwide, as well as data from Korea Information & Communications Credit Evaluation (NICE Information Service).

The average sales per small business in the second quarter amounted to 47.11 million won, a 4.53% increase compared to the same period last year. Average expenditure came to 35.22 million won, up 5.83%. The rate of increase in expenditures outpaced that of sales.

The average profit stood at 11.89 million won, up 0.85% year-over-year.

The profit margin declined for two consecutive quarters. In the second quarter, it was 25.2%, down 0.92 percentage points year-over-year. This follows a drop of 1.09 percentage points in the first quarter. During the same periods, sales increased by 1.89% in the first quarter and 4.53% in the second quarter, respectively.

A Korea Credit Data representative explained, “This means that the growth in sales among small businesses has not translated into actual profits but has instead been absorbed by increased costs for two consecutive quarters.”

Korea Credit Data found the issue to be even more severe when analyzing by metropolitan city or province. Profit margins declined year-over-year in eight out of sixteen regions.

The regions with the largest increases were South Chungcheong (up 2.38 percentage points), North Chungcheong (up 1.78 percentage points), and Incheon (up 1.63 percentage points). The biggest declines were seen in Jeju (down 2.13 percentage points), Sejong (down 1.57 percentage points), and Ulsan (down 1.24 percentage points).

The outstanding balance of loans also increased. In the second quarter, the total balance of loans to sole proprietors nationwide was 735.8 trillion won. Of this, bank loans accounted for 433.6 trillion won and non-bank loans for 302.2 trillion won.

The balance of bank loans to sole proprietors increased from 433.2795 trillion won in the first quarter to 433.5948 trillion won in the second quarter, a rise of 315.3 billion won (0.07%). During the same period, non-bank loans grew from 298.9557 trillion won to 302.1812 trillion won, up by 3.2255 trillion won (1.1%).

The amount of delinquent loans held by sole proprietors was 15.2 trillion won, up 4.3% from the previous quarter. This marks the second consecutive quarter of increase.

Among financial institutions, savings banks (5.7%) and mutual finance (3.5%) had particularly high loan delinquency ratios relative to their total loan balances. Out of the 3.625 million businesses with sole proprietor loans, 509,000 (14.0%) were closed, up from 13.9% in the previous quarter.

In the second quarter, the delinquency rate for sole proprietor loans at regional banks (Busan, Kyongnam, iM, Gwangju, and Jeonbuk) stood at 0.79%, about 1.8 times higher than that of the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NongHyup), which recorded 0.44%. The year-over-year increase in delinquency rate was 11.3% for regional banks, approximately 4.9 times higher than the 2.3% recorded by the five major banks.

As the share of unsecured loans at regional banks expands to nearly three times that of the five major banks, the data reveals that online banks are absorbing high-quality borrowers mainly through secured loans, leaving more vulnerable borrowers with regional banks.

An analysis by Korea Credit Data using its affiliate Korea Information & Communications Credit Evaluation's default scores found that among borrowers who took out loans solely from mutual finance last year, about 9.8% (worth approximately 23.3 trillion won) met the same risk level as those in the banking sector.

A Korea Credit Data representative stated, “Many borrowers at mutual finance institutions have higher business capability scores than banking sector borrowers, suggesting that a significant number are pushed into high-interest loans not because of business failure but because they fail to meet credit information standards.”

Kang Yewon, Head of Data at Korea Credit Data, said, “Small business owners are seeing their profit margins decline while delinquency amounts grow. We must not miss the golden time to revitalize local commercial districts.”

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