In July 2024, disaster struck some 50,000 small business owners who had been selling goods through online platforms. TMON and WeMakePrice diverted the sales proceeds owed to their merchants to other purposes, triggering a massive settlement delay. Through no fault of their own, the merchants went unpaid on roughly 1.3 trillion won ($940 million) in sales proceeds and were pushed to the brink of insolvency overnight.
The Homeplus case is much the same. Homeplus, a retailer they had long trusted, was driven toward insolvency by weak sales, and countless small business owners who never received payment are now reporting losses. Losses suffered by small business owners from unsettled sales proceeds at large retailers — TMON and WeMakePrice, Balaan and Homeplus among them — are estimated at more than 2 trillion won to date. Mismanagement at a handful of large companies has spilled over into harm for law-abiding small business owners.
As I weighed support measures for the affected small business owners during the TMON and WeMakePrice crisis, one familiar term caught my eye: trade credit insurance. It is a program that uses insurance to protect the trade receivables that small and medium-sized enterprises and small business owners hold after selling goods or services, and I had a connection to it, having handled the groundwork for its introduction in 2003. Yet of the some 50,000 small business owners hurt by the TMON, WeMakePrice and Homeplus cases, only eight ended up receiving insurance benefits. Tens of billions of won in policy funds and credit guarantees helped the affected owners clear the immediate crisis, but interest costs and principal repayments have come back as a boomerang, leaving them still in difficulty. Part of the reason may be insufficient promotion of trade credit insurance, but what is most regrettable is that the small business owners who are the intended users did not see a need to use it.
With the domestic demand slump dragging on and market interest rates rising, credit transaction risk for businesses is growing. At times like these, insurance should play a larger role than guarantees in protecting vulnerable small business owners. Policy loans and guarantees carry a heavy burden of interest and principal repayment, while insurance allows pre-emptive risk management without that burden.
The Korea Credit Guarantee Fund's trade credit insurance builds on the promissory note insurance (eum boheom) introduced during the 1997 Asian foreign exchange crisis to cover losses from dishonored promissory notes to prevent chain bankruptcies among small and medium-sized enterprises, expanding coverage to ordinary commercial receivables. Since the program began, it has covered roughly 300 trillion won in various trade receivables, and it is credited with removing the credit transaction risk businesses face, heading off unnecessary funding demand and thereby lifting overall corporate credit.
One shortcoming is that only about 8,000 small business owners — 0.1% of the total — hold the insurance, leaving use by vulnerable groups low. Close to one million small business owners close shop each year, and a survey by Industrial Bank of Korea likewise points to the insolvency of business partners and poor collection of trade receivables as leading causes of closure. In other words, managing business partners and trade receivables matters most to the stable operation of a small business.
As the industries small business owners operate in grow more varied and their transaction methods and patterns more sophisticated, there are clear limits to responding effectively to transaction risk that rises with their low credit standing. Tailored insurance plans on favorable terms should therefore be designed and supplied in greater variety, reflecting the characteristics of each industry, business size and counterparty, so that these owners can effectively hedge future credit risk through insurance.
New safety nets also need to be designed to reflect the changing nature of small business transactions, such as online platforms. As the TMON and WeMakePrice case showed, unusual settlement structures and the many interests involved limit how far existing programs can protect merchants. There is ample room to consider new types of insurance products geared to the transaction patterns and settlement risk of platform companies. Financial stability for small business owners as a whole is better addressed through sound program design than through direct fiscal support.