Increasing loan costs for Irish small businesses

Banks continue to charge small firms the highest interest rates in the eurozone. A new Central Bank report suggests the problem may have become worse for many small businesses, despite wholesale funding of banks resting at the lowest rates.

The latest report on small and medium-sized businesses (SMEs), which the Central Bank has published twice a year since 2010, reveals most small and medium-sized firms saw little change in the interest charged for their new loans from the previous survey, while “significantly more” firms across the eurozone reported the cost of their loans had fallen.

The gaps between the costs of borrowing for Irish SMEs are already the highest by far in the eurozone. Irish businesses are currently facing increased competition from British rivals following the drop in the value of sterling against the euro since the EU Referendum. This and potential hidden costs are adding to the pressure.

The report stated: “The premium paid on small versus large loans also remains substantially higher in Ireland.” The costs of loans of more than €1m tapped by larger firms were three percentage points lower, and 1.6 percentage points lower for firms seeking loans of between €250,000 and €1m.

Small businesses, most of which don't have access to other forms of finance, have been hit by the shortage of bank lending to businesses. SME lending fell by 2.9% in 2016 and has more than halved since 2010.

The Small Firms Association surveyed its membership and found that although 72% intend to invest in their business over the coming year, just 8% of SFA members are prioritising new lending from banks.

Linda Barry, Acting Director at the Small Firms’ Association, commented: "It's really positive to see a return to that investment mindset, but the divergence between the number who want to invest and the much lower number who are actually looking at bank credit raises an interesting point about the relationship between small businesses and the banks. Bank finance isn't for everybody, but if people aren't open to that option, then they are really constraining their prospects if they are unwilling to take on debt to finance their growth ambitions."

Small companies remain cautious about debt and in many cases, are still more focused on paying down their commercial and private debt.

Barry explained that borrowers remain discouraged from applying for loans in the first place, as they believe the requests would be turned down. Since the crash most decisions over credit have been centralised and taken far away from local branches.

The report also revealed a wealth of information about Irish small businesses. New lending has increased by almost a third in the year to €3.6bn, driven by manufacturing and firms involved in wholesale and retailing, but only three lenders accounted for 82% of all the new loans.

Barry said: "One of the things that would really help in the Irish situation is more competition. So if people are willing to invest in one of the existing banks, you would hope that there are also people looking at entering the market. That's what we would love to see.”

Here at TaxAssist Accountants we already have well-established relationships with all the major banks in Ireland and are able to help you prepare for your first and subsequent meetings with them. Get in touch today on 045 249 000 or use our helpful online contact form.

Date published 2 Aug 2017 | Last updated 27 Jul 2017