South Korea: Staying in business 5 years hard for start-ups

Courtesy of Yonhap via The Korea Herald
A promotion for lease at a building in Seoul suggests a climb in office-vacancy rate in the wake of a series of business closures among the self-employed in the nation.

A large portion of start-ups and self-employment endeavors failed in less than five years while suffering from fears of possible financial insolvency due to heavy debt, data from Statistics Korea and credit rating firm NICE showed on Jan. 18. Their unstable status was found to have started years before COVID-19 hit the nation.

According to Statistics Korea, the median individual start-up stayed in business for just 2.6 years. The journal in which it was published conducted research on the operations of start-ups from 2010 to 2018.

The median figure refers to the start-up whose ranking in terms of duration in the market placed in the middle among the total individual startups.

About 78% of them maintained operations for one year and 45% for three years. But only 31% were found to have survived five years.

This indicates that about 7 in 10 individual start-ups suffered business closure within five years after opening.

By age, duration of the median start-up was the shortest among owners under 35 at 2.3 years. This means half of the start-ups in the age group failed to survive for more than 2.3 years.

The corresponding period among those between 35-49 and those 65 or over recorded 2.9 years. Those 50-64 posted the highest at 3.1 years.

The thesis pointed out that “it is necessary [for the government] to change policies, given that the efficacy of support measures for start-ups among the young generation has been low.”

By business sector, the duration period of the median start-up was the shortest in both retail and finance and insurance services at 1.9 years, with the figure for food service at 2 years. By gender, figures for start-ups created by male owners outstripped those by women at 2.8 years versus 2.3 years.

When it comes to start-ups that have business partners sharing capital, technologies and management skill, the median posted survival of 5.8 years. In contrast, the figure for those without these sorts of partners stood at 2.5%.

Most start-ups are classified as self-employment in the nation. To make matters worse, more and more self-employed people have become saddled with heavier debt in the wake of the pandemic.

According to a report from local credit rating agency NICE, handed over to opposition lawmaker Yoon Chang-hyun, the outstanding loans issued by financial services firms to the self-employed came to 632 trillion won ($531 billion) as of November 2021.

This was a surge by 31.2% from 482 trillion won at the end of 2019, a month before COVID-19 initially hit the nation.

Further, the number of self-employed people who took out loans from three or more financial firms sharply increased over the corresponding period.

The “multiple debtors” accounted for 9.8%, or 272,000, of the total 2.76 million self-employed in November 2021. The tally surged by more than 100% from 128,000 at the end of 2019.

The outstanding borrowings of the multiple debtors reached 157 trillion won, which accounts for 24% of the total debt held by the self-employed at 632 trillion won. Per capita borrowings of the multiple debtors came to 576 million won.

By age, self-employed people in their 40s topped the list at 90,800, followed by those in their 50s at 87,600, those in their 30s at 44,900 and those in their 60s at 42,500.

Concerns are growing over possible en masse insolvency among the self-employed amid forthcoming hikes in the benchmark interest rate.