New lending to SMEs up 2.7% year-on-year

The Central Bank’s new SME market report confirms that new lending to small and medium-sized enterprises (SMEs) in the Republic was up 2.7% year-on-year in March.

The latest figures for Q1 2018 show that gross new lending rose by 2.7% compared with Q1 2017. This was driven largely by primary industries (11%) and the hotel and restaurant sector (3.7%).

In total, non-property related lending to small businesses across Ireland reached €16.2 billion by the end of Q1 2018.

However, one of the biggest issues surrounding the report is the lack of competition in the lending market. Three of the leading lenders accounted for more than four-fifths (86%) of all new lending dished out to SMEs in Q1 2018.

Nevertheless, the Central Bank believes the domination of a small band of traditional lenders is waning and has trended downwards since Q1 2016.

The SME finance market is rapidly expanding. There are a host of alternative finance options for ambitious start-ups, with peer-to-peer lending and invoice financing meaning many small firms are no longer seeking financial support from their banks.

In March this year, the Central Bank discovered that Irish SMEs applied for traditional loans and bank overdrafts at around half the rate of SMEs in comparative countries across Europe.

One of the primary reasons behind SMEs’ shift towards alternative finance is the “gradual increase” of rejection rates from high street banks and lenders.

The Central Bank says that Irish SMEs experienced a 17% rejection rate in September 2017, a figure that had risen steadily since March 2016.

‘Micro’ firms experienced the biggest rates of rejection from high street banks, with more than a quarter (28%) failing to secure finance.

The Central Bank said: “Bank rejection rates for SME loans and/or overdrafts in Ireland are more than twice the rates in comparator countries.”

The default rate for SME loans as of December 2017 was 22.6%, with this figure weighted based on overall loan size.

Earlier this year, a Central Bank bulletin warned that interest rates charged to SMEs were “substantially” higher than those elsewhere on the continent.

Date published 10 Aug 2018 | Last updated 10 Aug 2018