Fall in cost of credit for small businesses

Irish SMEs are paying significantly more for credit than their eurozone peers despite interest rates falling in the past year.

Michael Noonan said it was heartening to see the awareness of state supports

New research published by the Department of Finance showed that the average interest rate on new loans was 5.24 per cent — down from 6.7 per cent last September.

Despite a reduction in the cost of credit, Irish SMEs are still paying substantially more than the average eurozone interest rate of 2.53 per cent.

Credit demand among small and medium-sized firms has fallen this year with less than 25 per cent of firms applying for bank finance in the six-month period to the end of September. This is down from 30 per cent last September.

The subdued credit demand appears to be driven by the improving profitability of companies, which has reduced their need to take on additional debt.

Michael Noonan, the finance minister, said that the results of the survey undertaken by his department showed that the business environment in Ireland was improving and added that a greater number of businesses were aware of available government supports.

“The results of this latest SME credit demand show a subdued demand for credit from micro, small and medium-sized enterprises. However, encouragingly, the number of businesses reporting a profit has increased and more SMEs are investing in assets for their business.

“The mindset of SMEs remains focused on stabilisation and moderate growth of the business. Once again, it is heartening to see the growth in awareness for state supports that have been put in place by the government for Irish SMEs,” Mr Noonan said.

The report showed that in the six months to the end of September four in ten borrowers had to provide collateral when applying for a loan.

Buildings, land and personal assets were the most common forms of collateral provided.

The report does not identify any instances where undated letters of resignation were sought as collateral by banks, as reported last week.

The Sunday Times reported that both Irish pillar banks, AIB and Bank of Ireland, had requested such letters from customers.

Neil McDonnell, the Irish Small and Medium Enterprises Association chief executive, branded the practice as “offensive and extortionate”.

Borrowers’ reliance on the pillar banks is continuing to reduce with the survey showing three quarters of loans were provided by AIB or Bank of Ireland compared with 84 per cent a year ago.

More than a fifth of Irish SMEs believe banks are not lending to businesses.

New financing methods such as crowdfunding and peer-to-peer lending have struggled to make an impact in the Irish market, however, with less than 1 per cent of respondents seeking funding in such a manner.

About 75 per cent of SME loan applications were approved during the period.

Decline rates are highest among construction and business services companies.