Small Businesses Increase Sales, but Rising Costs Push Profit Margins Lower for a Second Straight Quarter

South Korean small businesses brought in more revenue in the second quarter, but costs grew faster and absorbed most of the gain. The result was another decline in profitability.

The Korea Credit Data report released Sept. 8 put average sales per small-business establishment at 47.11 million won, up 4.53% from 45.07 million won a year earlier. Average spending, including raw materials and rent, rose 5.83% to 35.22 million won from 33.28 million won.

Average profit increased only 0.85% to 11.89 million won. The average profit margin fell to 25.2% from 26.12% a year earlier, a drop of 0.92 percentage points. That followed a 1.09-point decline in the first quarter, showing that higher sales continued to translate into costs rather than meaningful profit growth.

Regional results diverged. Profit margins fell in eight of the country’s 16 major administrative regions, with the sharpest declines in Jeju, Sejong, Ulsan, South Gyeongsang and Seoul. Margins improved in South Chungcheong, North Chungcheong and Incheon.

Financial stress also deepened. Individual-business loans reached 735.8 trillion won, up 0.5% from the previous quarter. Non-bank lending rose 1.1%, compared with a 0.1% increase in bank lending. Delinquent loan balances climbed 4.3% to 15.2 trillion won, while the number of closed businesses among borrowers reached 509,000 and their share rose to 14.0% from 13.9%.

Regional banks reported a 0.79% delinquency rate for individual-business loans, up from 0.71% a year earlier and about 1.8 times the 0.44% rate at the five major banks.