Korea’s entrepreneurs face tough times ahead

35 year-old Kim, who used to work for a conglomerate, now spends long hours frying chicken. He is currently faced with huge debts and falling sales due to the outbreak of avian flu.

It’s been two years since a 35-year-old man surnamed Kim said goodbye to his life as a salaryman at a conglomerate to become an entrepreneur. He gave up a job that paid 70 million won ($58,580) annually and has little to show for it except mounting debt and long daily working hours.

Kim’s fate is shared by many. According to data collected by the government, the number of entrepreneurs in Korea is rising - but so too is the amount of loans taken out by them.

Another stat on the rise: the number of small businesses that don’t hire anyone at all.

“Friends who visit my restaurant in Jangan-dong, east-central Seoul, all envy me for being a self-made man,” said Kim, who runs a franchise fried chicken restaurant. “Friends who are still salary men like I used to be particularly express that sentiment. I tell them not to be fooled and recommend they must stick with their current jobs no matter what.”

If those friends would care for proof, Kim has some pretty worrying numbers.

To keep his restaurant open, about 20 million won goes out the door each month. Kim pays 2.8 million won monthly for rent and utilities and 6 million won in labor costs. 1.3 million won seeps out of his account to pay off the principal and interest on loans he borrowed to start the business. Kim’s biggest overhead cost is the nearly 10 million won paid to the franchise headquarters monthly.

It’s no longer rare for Kim to return home at the end of the month without a penny to support his family.

Kim says it was a delusion to think he would be better off running a franchise branch than opening up his own restaurant.

“When I hear that headquarters’ sales are going up and that it is expanding its branches, it drives me crazy,” Kim said. “It makes me wonder who I am actually working for - myself or for headquarters.”

And some entrepreneurs are in even worse shape than Kim.

Another franchise chicken restaurant owner said he recently had to borrow from a loan shark because he could not afford to pay the franchise headquarters.

“Before I opened the chicken restaurant, I ran a pub,” said Kim. “I thought I would pay my dues before my children got older and build something for myself. I started the pub with high hopes but things went south in just eight months. By then, I was out on the street with 50 million won in debt.

“Opening up this restaurant was an effort to get back on my feet, but look where I am? For the first few months, my wife helped out with the business and we sent our kids to the local day care center. My wife and I would be in pain all night after carrying and frying 16 to 20 kilograms (35 to 44 pounds) of chicken. Even now, I work until 2 a.m. but things are not looking good.”

Kim has been sending around his resume lately to find a day job to compensate for a drastic drop in revenue — nearly 20 percent compared to last month — after the outbreak of avian flu (AI). Kim also plans to let go of his only employee in January. “When will I stop treading water?” Kim asked.

According to the Statistics Korea, there were about 5.68 million entrepreneurs in Korea as of the third quarter of this year.

Of that figure, nearly half reported less than 50 million won in annual incomes before expenses and taxes. Other statistics agency data announced Thursday shows that out of 4.79 million self-employed registered, about 2.4 million earned below 46 million won in gross income in 2015, which was a 4.2 percent year-on-year fall.

“The number of entrepreneurs here excludes agriculture and fishing industries and the income data is based on their tax information provided by the National Tax Service,” explained an official from Statistics Korea. “Unfortunately, the sales figures continue to fall.”

The data also indicate that out of 4.79 million entrepreneurs, over 3.7 million, or about 78 percent, made less than 150 million won last year.
The number of small business owners who can’t afford any helping hands also witnessed a dramatic increase. In the first quarter this year, about 3.86 million entrepreneurs ran their businesses alone.

By third quarter, this number climbed to 4.08 million, a 1.3 percent rise in less than a year.

Entrepreneurs are facing fierce competition, especially the owners of chicken or barbecue restaurants, who often put everything they have at stake, including their savings and severance payments.

The Ministry of Agriculture, Food and Rural Affairs reported that by 2014, there were 651,000 restaurants in Korea, about one restaurant for every 78.8 Koreans. Since 2011, the number has increased 7.2 percent annually on average.

And with a struggling economy, customers are getting more tight with their money. The Composite Consumer Sentiment Index (CCSI), which shows people’s willingness to spend, stood at 95.8 last month, the worst number since April 2009, which was in the wake of the global financial meltdown the previous year.

To make matters worse, out of 479 restaurants surveyed across the country, 21.2 percent answered their sales plummeted after the imposition of a new antigraft law, the so-called Kim Young-ran Act.

Nearly 27 percent of them were considering changing their businesses in some way or closing them altogether.

“While sales continue to drop, it becomes more and more difficult for small business owners to take out loans,” said Choi Seung-jae, president of the Korea Federation of Micro Enterprise. “Without a way to escape from the pit, they end up going out of business and their standard of living takes a toll. Some even fall into the lowest income group.”

That was precisely the fate of a 28-year-old man surnamed Choi. Choi resigned from a company five years ago and opened a coffee shop franchise. On top of his severance, he took out a 200-million-won loan from a private lender to use as starting capital. Business was good for the first three years. Two years ago, headquarters asked him to redecorate the shop. Choi had to borrow more money. Competition on his block had increased.

His sales were sliced in half and he ended up closing the café. Choi is heavily in debt without any source of income.

Luckily, Choi didn’t take out loans from illegal loan sharks, who exploit desperate customers and charge outrageous interest rates.

Korea Ratings Corp data show that the total amount of loans taken out by entrepreneurs in Korea stood at 185.5 trillion won in June 2016, up about 20 trillion won or 4.4 percent compared to a year earlier.

At first, entrepreneurs borrow money from a bank to start a business. But when they get into trouble, they often turn to private lenders to scrounge up additional funds.

A vicious cycle ensues and some see their credit ratings hit rock bottom. Then they are forced to turn to illegal loan sharks.

“The illegal loan market is seeing a rapid rise,” explained Shim Ji-hong, director of Korea Consumer Finance Institute, a private research center at Dankook University. “Our data is an estimation since there is no official government data on this. But we’ve seen the market expanding, especially since 2008. That’s when the government came out with a policy to provide more small loans to the general public at lower interest rates.

“The policy eventually jacked up demand for loans but there wasn’t enough supply and some people were forced to borrow money from private lenders. When the private loan market was also saturated, they eventually turned to illegal lenders. I am skeptical that all entrepreneurs are bad credit risks, but it is true that some of them fall into the debt trap.”

BY SUNG HWA-SUN, MOON HEE-CHUL AND CHOI HYUNG-JO [choi.hyungjo@joongang.co.kr]