Farmers pay least for loans despite rising interest rates
FARMERS pay less to borrow than any other business sector, according to a new report on lending to small and medium enterprises (SMEs).
Borrowing costs are rising across all sectors for Irish business borrowers, the report shows, even though companies here already pay more to borrow than their European rivals.
Most Irish SMEs have bank debt, according to the research, but 38pc of Irish businesses have no debts at all.
Among those that do have outstanding loans, 12pc have been behind on loan repayments over the past six months.
Borrowing costs vary hugely even for similar sized businesses, according to the new Economic and Social Research Institute paper called 'SME and Interest Costs in Ireland'.
Average interest rate charges range from 3.7pc per year in the agriculture sector to 5.9pc for professional services firms such as accountants and solicitors, according to the reports.
Manufacturers and retailers pay 4.8pc a year in interest while charges are higher for hotels (4.9pc) and construction and real estate (5.1pc).
Despite access to cheaper credit, farms have the smallest bank debts of any sector, on average, at €78,000.
The smallest businesses have, on average, the highest borrowing costs. So-called micro companies are paying 5.7pc a year in interest compared with 4.9pc for small firms and 4.4pc for medium sized enterprises – which in the case of Ireland typically included even relatively large employers.
Relative to turnover, the smallest businesses are the most indebted, the report shows.
Unsurprisingly, the hotel sector is the most indebted, both in terms of the average debt owed, at €2.6m, and in terms of the ratio of loans to current turnover, among SMEs.
The ratio of loan-to-turnover (LTT) is treated as proxy for sustainability by the report authors. By that measure businesses in all sectors have debt lower than the total annual turnover, with the exception of the hotel and building sectors.
However, the figures suggest that the average Irish SME has debts equal to around 20 years' of profits at current levels – a measure of just how weighed down balance sheets are following the lending boom.
Businesses that borrowed from foreign-owned banks owe two-thirds more than companies with loans from Irish lenders, the study shows.
The average interest rate charged by foreign-owned lenders is 5.5pc, compared with 4.9pc by the Irish banks.
The bigger loans and higher interest rates at the foreign-owned banks reflects their later entry into the market – close to the top of the boom. It also reflects some banks' specialisation on sectors such as hotels.