"Even Pizza Shops are Collapsing": Self-Employed Face Bankruptcy Crisis Amid Interest Rate Shock

Self-employed individuals in South Korea are facing a severe recession and potential bankruptcy as rising interest rates and structural franchise issues drive small business owners toward closure.

While South Korea's economic indicators appear healthy due to a semiconductor boom, the foundation of the real economy tells a different story. Self-employed individuals and the youth are experiencing an extreme recession, leading to a deepening "K-shaped" polarization where the stock and real estate markets remain hot while livelihood-based small business owners collapse on the brink of closure.

In a conversation on the channel The Man Who Explains the Economy (Kim Kwang-seok TV), Park Gi-tae, a lawyer at Hanjung Law Firm specializing in rehabilitation and bankruptcy, revealed the grim reality facing the self-employed sector. Park diagnosed the downfall of small business owners as being at a very serious level, noting a particularly visible increase in the closure of franchise businesses recently.

"A Structure Where You Can't Save Money When Business is Good"... Franchise Closures Lead to 300 Million Won in Debt

Park identified the franchise system as one of the structural problems within the self-employed industry. Among the traditional trio of small businesses—chicken, pizza, and Jajangmyeon—the closure of pizza specialty shops has been surging recently. A major issue is that under the franchise structure, it is extremely difficult for owners to accumulate capital even when business is good, as they often only manage to take home enough to cover their own labor costs.

When an owner decides to close a business without having accumulated capital, the costs fall entirely on them. This includes contract termination fees with the headquarters, payments for unsold materials, and obligations to restore interiors to their original state. According to Park, there are numerous cases where individuals are forced to choose rehabilitation or bankruptcy because they cannot afford costs of approximately 300 million won incurred during the closing process. As cases of failed franchise operations have increased this year, many find it impossible to engage in any economic activity without undergoing rehabilitation or bankruptcy.

The Trap of Interest Rate Shock: Real Estate Investment Leads to Denied Final Loans

Another decisive crisis facing the self-employed is the rise in interest rates. Park explained that self-employed individuals who invested in income-generating real estate (such as commercial buildings or knowledge industry centers) during the low-interest period of 2021 are now being hit directly by the interest rate shock. At the time, near Gangnam Station and other areas, there were many temptations to purchase multiple properties with small down payments. Following explanations that a 20 million won down payment could cover the rest through intermediate and final loans, many used retirement pay or business operating funds to engage in "leverage investing" by contracting multiple commercial units.

The problem arose when interest rates on intermediate loans, which were floating rates, surged. Interest rates that were in the 3% range in 2021 soared to the 6–7% range in 2023, doubling the monthly interest burden. For example, if a 700 million won loan was taken, monthly interest jumps from approximately 1 million won to 2 million won. In this process, missing even one or two interest payments causes credit scores to plummet, leading to fatal consequences. If creditworthiness drops, the "final balance loan" required for the last step of registering the building is rejected. Consequently, owners fall into a vicious cycle where interest continues to accumulate without the real estate ever becoming their property.

Ultimately, as tenants fail to move in or rental income fails to keep up with rising interest costs, investors are being pushed toward bankruptcy. Park emphasized that this interest rate shock hits those who operate businesses or invest in assets through loans in a very direct and extreme manner.

The Cries of "Non-Wage Workers" Hidden by the Semiconductor Boom

The current South Korean economy is in a state where the semiconductor boom is driving overall indicators, masking the crisis in the self-employed sector. Kim Kwang-seok analyzed that the shadows of the economy are not visible thanks to the semiconductor boom. However, the situation for non-wage workers (the self-employed), who are the core of the real economy, is different. Unlike wage earners, the self-employed have an overwhelmingly high dependence on loans to operate their businesses.

Self-employed individuals rely on loans not only for startup capital but also for operating funds to endure labor costs, rent, and rising raw material prices. They operate on a structure of enduring through loans when sales do not support them. In particular, because vulnerable groups—who are often multi-debtors and low-income earners—are concentrated in self-employment, there are warnings that if interest rate hikes and shrinking consumption coincide, the impact on them could expand to the level of a social disaster. Kim projected that when interest rates rise, consumer sentiment shrinks, and unprepared self-employed individuals in B2C sectors, such as franchises and the food industry, will be the first and most direct victims of the interest rate hike.

Source: original video (YouTube)