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Paying the Price for the Interest Rate Hike: Small Businesses Pay 3 Times the Interest of Larger Businesses

The share of small and medium-sized businesses in the total national credit continues to decrease, and the Ministry of Economy has reported increasing instances of companies not receiving the credit they need | In the last two years, the interest rate has risen to 4.75%

רחוב יפו בירושלים. (צילום: יונתן זינדל/פלאש90)
Jaffa Road in Jerusalem (Photo: Yonatan Zindel/Flash 90)
By Maya Ronen

According to data published earlier this month by the Ministry of Economy, medium and small businesses have an increasingly small share of the overall credit held in banks. The last cycle of interest rate hikes made it particularly difficult for small businesses, which pay 3 times the interest rate of large businesses.

In the first quarter of 2023, the share of small and medium-sized businesses dropped to a low of 38.6% of total credit in the economy. This is a decrease of 1.7 billion shekels ($447 million) in business credit. On the other hand, there is a significant increase in credit for large businesses, an increase of about 71% compared to 2019. Just in the first quarter of 2023 large businesses saw an increase of 7.5%.

This trend of small businesses’ decreasing share of national credit has been ongoing for several years. At the end of 2022, their share stood at 40.5%, compared to 44% at the end of 2021 and 45.8% at the end of 2020.

The increase in interest rates appears to be a decisive factor driving the situation. Increased interest rates increase credit costs for all businesses, but small businesses face higher rates. Large businesses, with a turnover of over 250 million shekels ($66 million), face an interest rate of 1.9%, for businesses with a turnover of 5-10 million shekels ($1 million-$3 million), the interest rate is 5.8%

The proportion of businesses that reported a credit crunch in 2022 (meaning they reported that they did not receive the financing they needed) was 34%, compared to 31% in 2021. This is alongside an increase in the volume of businesses that received the full amount of credit they requested, 48% in 2022 compared to 39% in 2021.

Yossi Ades, director of the financing department at the Ministry of Economy, told Davar: “In recent years, we have seen a downward trend in the share of small businesses in the business ‘credit pie’ in the economy, a trend that strengthened at the beginning of 2023. And their share today stands at only 38.6%, while their share in the GDP actually has increased and stands at approximately 55%. It is possible that part of the trend in the recent period is due to the increase in interest rates, which resulted in a decrease in demand for credit. However, in the examination we did, we saw that the proportion of businesses that have difficulty getting credit increased in 2022 compared to 2021.”

For comparison, between the years 2019-2022, the volume of credit for large businesses increased by 59.5%, compared to very small businesses, for which credit increased by only 9%, small businesses, for which credit increased by 27%, and medium businesses, for which credit increased by 32%.

The Ministry of Economy's response to the situation consisted of a change in the workings of the fund that provides state-guaranteed loans to small businesses at the end of 2022. For example, the number of organizations participating in the fund has increased to 11 credit providers: seven banks and four non-bank entities. The ministry believes that increasing the number of entities participating in the fund will lead to increased competition and benefit the conditions for businesses.

In addition, the rate of collateral that businesses are required to provide for loans has been reduced and now stands at up to 15%, compared to 25% in the 2016 fund.

Businesses have also increased their credit from non-bank sources, such as venture capitalists. Total non-bank credit stood at approximately 12.5 billion shekels ($3 billion), an increase of 11% compared to the end of 2021. As with bank credit, there was also a decrease in non-bank credit in the scope of the credit in the first quarter of 2023, which amounted to about half a billion shekels.

Naomi Himeyn Raisch, director of the agency for small and medium-sized businesses said the trend revealed the need for further action.

“The continued trend of a decrease in the share of small and medium-sized businesses in total credit, and even a decrease in actual credit at the beginning of the year, shows that intervention is required to promote credit for small and medium-sized businesses,” she told Davar. “We work with a number of tools to promote credit for small and medium-sized businesses, including the promotion of non-bank credit, the introduction of these entities into a state guarantee fund and more. These days we are considering additional measures to ease the credit crunch for small and medium businesses."

This article was translated from Hebrew by Nancye Kochen. 

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