NBFCs Vs Banks: Which One Is Better For Business Loans?

As a business proprietor, your dependence on bank loans is well known as your business goes through a rollercoaster ride. There are very few businesses that can stand the test of business cycles and face headwinds with no business loan. Businesses that cannot scale up due to capital crunch always turn to bank loans. The government has started supporting small and medium enterprises (SMEs) with various schemes and loan facilities. Here’s everything you need to know about NBFCs vs banks and which one is better for getting business loans.

1. Eligibility Requirements For Loans

When it comes to getting a business loan, banks usually have strict criteria they need to meet in order to approve it. This includes a lot of background checks and paperwork to make sure the loan amount is legit. They also want you to have a good credit score, have experience running a business, and make a yearly turnover. It goes without saying that this entire procedure is quite time-consuming for the borrower.

In contrast, Non-Banking Financial Corporations (NBFCs) have fewer approval processes for loan applications and adhere to a streamlined process to provide their customers with the necessary financing. It's much easier for someone with a low credit score and not much business experience to get approved for a loan through an NBFC.

2. Interest Rates

Getting the money you need can be exciting, but it can also come with a hefty interest bill. With higher interest rates, you'll have to pay more on your EMI. That's where NBFCs come in. The interest rates offered by NBFCs on business loans are quite low compared to banks. So, you don't have to worry about paying high interest when you're taking a commercial loan from an NBFC.

The interest rates charged by Non-Banking Financial Corporations (NBFCs) can be relatively low due to the fact that they are based on the Prime Rate, which is not regulated by the RBI. As a result, they have the ability to vary their interest rates for business loans in order to draw in more customers. Furthermore, loan processing costs and other associated fees charged by these financial institutions are typically lower than those charged by banks.

3. Credit Scores

Banks adhere to strict regulations and require the borrower to possess a high credit rating, as a business with a low credit rating is regarded as a risk. According to Abhay Bhutada, MD of Poonawalla Fincorp, a business loan can help entrepreneurs mitigate any kind of cash-flow problems.

Non-banking financial corporations (NBFCs) may provide and approve small business loans even if the borrower's credit score is low. However, in this case, the borrower may be required to pay a higher interest rate in order to mitigate the risk of default.

4. Documentation

Most people go for business loans from non-banking financial corporations (NBFCs) because they don't require as much paperwork and documentation. Banks, on the other hand, can be pretty strict when it comes to approving documents.

If you can't provide the necessary documents, banks might not approve your loan and turn it down. But, with minimum documentation, business loans from an NBFC are processed much more quicker than a bank.

5. Pre-Approved Loan Limit

A lot of NBFCs give you pre-approved business loan limits. It means you can take money out whenever you need it. So, you only pay interest on the amount you take out, not on the whole limit. This gives you more flexibility and saves you time since you don't have to keep applying for business loans every time something opens up.

Bottom Line

The foregoing information suggests that Non-Banking Financial Companies (NBFCs) have a slight advantage over banks in terms of business lending. However, it is important to note that banks are the more established and dependable source of financing. It's essential to consider the advantages and disadvantages of both banks and Non-Banking Financial Corporations to determine which option would be most suitable for you.