Struggling businesses can access half-price loans from German bank
SMALL businesses are to get access to loans from Germany at half the rate of interest being charged in Ireland under a plan approved by Angela Merkel.
The German chancellor has instructed her state investment bank to work closely with the Irish authorities to improve funding for the economy, including access to finance for small and medium businesses.
But loans may also be made available for investment, infrastructure and larger companies.
The development is intended to result in Irish companies borrowing money at a cheaper interest rate than the rate offered them by Irish banks.
At the moment, the average interest rate being charged to an Irish small company is estimated at 4.5pc – more than twice the rate for a corresponding company in Germany, where funding is available for 2pc.
The provision of additional credit and cheaper rates is also expected to encourage more companies to invest.
"The demand for credit depends on the price. There will be more demand for lending if we can lower the rate," a Government source said.
The deal came about following talks between Taoiseach Enda Kenny and Chancellor Merkel about ways to support the economy.
The German development bank, KFW, will explore ways to provide the funding.
The money comes at a cheaper rate because KFW is a triple-A rated bank, so it can borrow money more cheaply and pass this to its customers.
The loans will be funnelled through the National Treasury Management Agency and the new Strategic Investment Fund or the state-owned banks, AIB and Permanent TSB.
The Taoiseach said Ms Merkel personally pledged to work closely with Ireland to improve funding mechanisms.
In a statement, Ms Merkel said the German development bank will work with the Irish authorities "swiftly, in order to deliver on this initiative at the earliest possible date".
Following the announcement, the Irish Bankers Federation (IBF) published research showing a fall off in lending to business in the early part of this year, but banks insist this is because businesses do not want to borrow.
IBF director Felix O'Regan said any increase in credit supply is to be welcomed.
However, he said lenders that are active here are struggling because of low demand.
Boosting business confidence, by driving consumer spending, is the best way to do that, Mr O'Regan said.
Bank of Ireland head of small business Gerry Prizeman said firms are nervous of new debt.
Business borrowers only drew down half of the €3.6bn of loans the bank had sanctioned in 2012, for example. Borrowers are currently using less than 40pc of the money available on their overdrafts.