Small businesses felt the crunch in the fourth quarter of last year as interest rates climbed, with Central Bank data showing a rise in the cost of new borrowing of more than one percentage point. The average price of an SME loan was 5.23%, compared to 4.11% the quarter prior, a clear sign that the European Central Bank’s rate hikes had made their way to the business sector.
Indicators of credit appetite also reversed, as small businesses shied away from new loans due to economic uncertainty. Both gross and net new lending dropped for the first time in over a year, with net lending reducing by €272m and the gross amount advanced to SMEs sinking below €1bn for the first time since 2021.
The outstanding stock of loans to small businesses also decreased by 1.4% over the quarter, totaling €18.4bn – a continuation of a long-term trend that began with the global financial crisis. Of this, two-thirds are core credit for business, while the remainder is for property and construction.
ISME chief executive Neil McDonell noted that SMEs remain cautious about debt, pointing out that many businesses were anxious about future economic disruption. He added that the only area that showed a debt appetite was for long-term, low-rate products like the Future Growth Loan Scheme (FGLS), since short-term debt was too expensive in comparison to other European countries.
The Strategic Banking Corporation of Ireland, which administers the subsidized FGLS, reported a decline in demand towards the end of the year. Goodbody chief economist Dermot O’Leary pointed out that SME credit was significantly higher a decade ago, and that the ongoing low level of lending was due to the ability to fund from working capital rather than just the interest rates.
AIB’s head of SME for retail banking John Brennan said some customers were deferring investments due to the current rate environment and inflation uncertainties. He said credit demand stayed “subdued” due to the Government supports that improved the financial positions of many SMEs, and thus their need for working capital had not grown.
Bank of Ireland, which had its first year of net lending growth in business banking in over 10 years, stated that it was eager to lend but demand was stable because of strong company balance sheets and ample cash deposits. Permanent TSB also reported that SME lending had been a significant area of growth in 2022, as the company had recently entered the market. However, businesses were understandably cautious about inflation and interest rates.
One area of loan growth was in overdrafts and credit card debt.
