Small businesses slammed by higher rates cut their borrowing

The average price of a new SME loan was 5.23pc in the last three months of the year, up from 4.11pc in the previous quarter, a sign that rapid hikes in European Central Bank rates are feeding through to the business sector.

Indicators of credit appetite went into reverse, too, as small businesses backed off new borrowing amid economic uncertainty.

Both gross and net new lending fell for the first time in over a year as firms paid back more than they borrowed. Net lending fell by €272m in the quarter, while the gross amount advanced to SMEs fell below €1bn for the first time since the third quarter of 2021.

The outstanding stock of loans to small businesses also fell by 1.4pc during the quarter to €18.4bn in a resumption of a long-term trend stretching back to the global financial crisis. Two-thirds of that amount is core credit for business and the remainder is lending for property and construction.

“SMEs remain wary of debt, as do their banks,” said ISME chief executive Neil McDonell, adding that many businesses were worried about economic disruption ahead.

“The one area we can see a debt appetite is on longer-dated, low-rate products such as the Future Growth Loan Scheme (FGLS). Compared to European peers, short-term debt is simply too expensive here, and the application criteria remain onerous.”

The Strategic Banking Corporation of Ireland, which distributes the subsidised FGLS, said it too had experienced a slowdown in demand at the end of the year.

“The very low level of business lending is not a new phenomenon,” said Goodbody chief economist Dermot O’Leary, pointing out that outstanding SME credit was more than three times greater a decade ago.

“The ongoing low level of lending is due more to relatively healthy balance sheet positions and the ability to fund from working capital rather than the level of interest rates.”

AIB’s head of SME for retail banking John Brennan said some customers were deferring investment decisions due to the current interest rate environment and uncertainty about inflation.

He said credit demand remained “subdued” because many SMEs used Government supports during Covid which improved their financial positions, meaning the need for working capital had not increased.

Bank of Ireland, which reported its first year of net lending growth in business banking in over a decade, said it was “keen to lend” but demand was stable due to strong company balance sheets and ample cash deposits.

A Permanent TSB spokesperson said SME lending had been a significant area of growth in 2022 as the company had only recently entered the market and the bank had not experienced a slow-down in the level of borrowing, although businesses were “understandably cautious” about inflation and interest rates.

One area of lending growth has been in overdrafts and credit card debt.