When seeking a business loan, it’s essential to understand the pros and cons of borrowing from banks versus Non-Banking Financial Companies (NBFCs). As a business owner, being well-informed about these financial institutions can help you make the best decision for your financial needs.
The Government of India has made significant efforts to simplify the process of obtaining MSME loans, making it easier to apply for a business loan online. However, the choice between banks and NBFCs often leaves many MSMEs in a dilemma.
Both banks and NBFCs offer tailored financial solutions to meet the needs of small businesses, but they differ in terms of eligibility, disbursement speed, and other factors. To make an informed decision, it’s important to understand the differences between these two types of financial institutions.
What Is a Bank?
A bank is a financial institution legally authorised to receive deposits and provide loans. Banks also offer a range of financial services, including safe deposit boxes, wealth management, and currency exchange.
Banks are regulated by the Reserve Bank of India (RBI) and typically offer lower interest rates due to their access to cheaper capital. However, they also have stricter eligibility criteria and a longer loan approval process.
What Is an NBFC?
Non-Banking Financial Companies (NBFCs) are institutions that provide financial services similar to banks but do not hold a banking license. NBFCs offer loans and advances, credit facilities, investment products, and more. In India, there are various types of NBFCs, including:
- Loan Companies
- Asset Finance Companies
- Microfinance Companies
- Housing Finance Companies
- Infrastructure Finance Companies
- Investment Companies
- Core Investment Companies
- Mortgage Guarantee Companies
NBFCs are not regulated by the RBI like banks, which allows them more flexibility in interest rates and eligibility criteria.
Banks or NBFCs: Which One Should You Go For?
While banks have traditionally been the preferred choice for business loans, NBFCs are gaining popularity, especially for instant business loans. According to a BCG report, NBFC loan growth post-pandemic was 15.1%, compared to 20.5% for banks. Despite the slower growth, NBFCs offer several advantages over banks.
Easy Loan Application Process
Banks often have a lengthy and stringent loan application process, requiring substantial documentation and time for approval. In contrast, NBFCs offer a quicker and simpler application process. NBFCs can be a more attractive option for business owners needing instant loan approval.
Competitive Interest Rates
Bank interest rates are tied to the Marginal Cost of Lending Rate (MCLR) and regulated by the RBI, limiting their flexibility. On the other hand, NBFCs set their own interest rates and terms, as the RBI’s strict regulations do not govern them. This flexibility allows NBFCs to offer competitive interest rates tailored to the borrower’s needs.
Relaxed Eligibility Criteria
Banks have stringent eligibility criteria for loan applications, including high credit scores and detailed financial history. NBFCs, however, have more relaxed criteria, making it easier for businesses to qualify for loans. This customer-friendly approach has attracted many business owners to NBFCs.
Flexible Credit Evaluation
Banks rely heavily on credit scores to assess a business’s creditworthiness. In contrast, NBFCs use a broader approach, considering various factors such as the industry, business tenure, bank statements, turnover, and income tax returns from the past two to three years. This comprehensive evaluation process often results in more businesses qualifying for loans from NBFCs.
Choosing Between Banks and NBFCs
Both banks and NBFCs offer business loans, but the choice depends on your specific needs and circumstances. Banks are ideal for those seeking lower interest rates and can meet stringent eligibility criteria. However, if you need quick approval and flexible terms, NBFCs might be the better option.
To find the best financial institution for your business loan, research the offerings of both banks and NBFCs. Visit their websites to compare loan products, interest rates, and terms. Additionally, seek feedback from other business owners about their experiences with these lenders.
Wrapping Up
When it comes to securing a business loan, both banks and NBFCs have their unique advantages. Understanding these differences can help you choose the right lender for your financial needs. Whether you opt for a traditional bank loan or prefer the flexibility of an NBFC, ensure you thoroughly evaluate your options to make an informed decision. By doing so, you’ll be well on your way to securing the necessary funds to grow and expand your business.
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