Photo/Illutration A business owner, front, discusses coronavirus-related loans with an employee of a financial institution in Nagoya in April 2020. (Eitaro Takeyama)

Small and midsize businesses are going bankrupt at a faster pace than during the COVID-19 pandemic as loans taken out during the difficult economic times are coming due. 

In May, when COVID-19 was downgraded to the same category as seasonal influenza, there were 704 bankruptcy cases involving small and midsize companies, a year-on-year increase of 34.3 percent, according to Tokyo Shoko Research Ltd.

In July, when repaying “zero-zero loans” peaked, bankruptcy cases rose to 758, up 53.7 percent from the previous year.

Provided by financial institutions to small and midsize firms whose sales fell during the pandemic, the loans were virtually interest-free and required no collateral. Many companies are beginning to repay the loans, which may lead to more bankruptcies.

“There is a strong tendency for companies to fall into excessive debt and then give up on continuing their businesses,” said an official of Tokyo Shoko Research.

In the loan system, the central and prefectural governments covered the interest on the loans for three years. Public institutions, such as local credit guarantee associations, act as guarantors if the companies fail to repay.

This means if the principal cannot be collected, the burden virtually falls on public taxpayers.

While the loans supported the cash flow of struggling small and midsize firms during the pandemic and helped prevent bankruptcies, there were also concerns that they may have simply “prolonged the lives” of companies that inherently lacked earning power.

The industry sector with the highest number of bankruptcies in July was the service industry, with 262 cases--a year-on-year increase of 69 percent. It accounted for 34.5 percent of the total.

Within that sector, the restaurant industry represented 71 cases, up 73.1 percent from the previous year.

Generous public support has stopped as price surges exacerbate the situation for many businesses.

After the reclassification of COVID-19, the accommodation industry has been recovering thanks to growing demand for inbound tourism.

However, the restaurant industry has not benefitted from the change.

Support measures, such as a subsidy for shortening operating hours that bolstered business during the pandemic, have ended. The burden of higher electricity and gas prices, along with price surges, are also weighing down firms.

As COVID-related public support fades, the true resilience of businesses will be tested.

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