Reforms make it easier for start-ups to access funding

The government plans to reform its loan guarantee program for private companies for the first time in almost 40 years to support start-ups.

The Financial Services Commission (FSC) announced the plan on Wednesday to reform the state-run guarantee system for loans which was launched in 1976. The aim is to offer more funding for start-ups and reduce benefits for so-called zombie companies which are struggling with insolvency problems.

“We will offer full support for start-ups particularly in their early stage,” said Son Byeong-du, a senior FSC official. “For other companies, which have received the government guarantees for a long time, we will categorize them based on their growth and provide tailor-made guarantees.”

Up to 90 percent of loans for start-ups will be guaranteed by the government, according to the plan, an increase from the current 85 percent.

Also, the guarantee for start-ups will be automatically extended for between five and eight years. Start-ups currently need to seek extension approval every year.

The requirement for annual approval was an issue for many companies, as some authorities demanded they partially pay back loans or turned down the extension due to worsening risk factors.

Other core benefits for start-ups include the removal of joint liability, which required that the borrower or their relatives or friends guarantee the loan jointly with the government.

Joint liability has been a major hurdle in Korea’s start-up industry, making many Koreans shun starting their own business in the country.

Currently, the government exempts the joint liability requirement for start-up younger than three years with a credit rating of BBB or higher. The new plan will remove the requirement for start-ups younger than five years, regardless of their credit rating.

The measure is expected to raise the number of start-ups exempted of joint liability to more than 40,000, from 1,400 now, the FSC said.

At the same time, the government will cut the guarantee rate for so-called zombie companies - firms with a yearly operating profit so low they can’t make interest payments on loans.

The trimmed guarantee for loans comes after a rising public call to restructure insolvent firms.

“If a company has little possibility to recover, we should restructure them as soon as possible,” said FSC Chairman Yim Jong-yong.

“We should distinguish those who can survive and others who can’t, and focus on funding for the companies that can do better.”

BY KIM HEE-JIN [kim.heejin@joongang.co.kr]