Should You Choose NBFCs or Banks for a Business Loan?

With the new generation taking over the world, most people wish to open up businesses of their own. But the success of a business is rare as the odds are high. Out of every 10 businesses that are started, 7 of them fail within 10 years. There are many reasons a business can fail, but capital is crucial.

Just as to run a machine, constant oil is required, in the same way, to run a business, capital is required. Insufficient capital in the system is not the cause, not being able to obtain those funds is the reason. When a business runs out of capital, it is like a slow death (closure) of the same.

Sources of Raising Capital

There are many ways a business can raise funds such as – venture capital, angel investors, partnerships, and more. These methods are recommended for those who have not yet started their business, or need a vast amount of capital (and have no funds of their own) to begin. These methods are often preferred by mature startups looking to expand exponentially, or people who have extremely innovative ideas that need a lot of initial investment.

Regular small businesses however, that are mildly profitable and have been in existence for 3 years or more, tend to turn toward taking up a loan. A business loan is more preferable among small businesses that have a conventional product / service offering and need extra funds to manage their working capital needs or business expansion plans. A loan can be taken from a financial institution that can either be a bank or an NBFC (Non-banking Financial Company).

Let us first understand the 2 financial institutions –

A. Banks

A bank is a financial institution that primarily conducts 2 activities:

1. Accept deposits.
2. Grants credit.

Banks are more public-oriented. They can perform lending activities directly or indirectly (through capital markets). Banks in India are registered under the Banking Regulation Act, 1949. Since they use the funds obtained from depositors as their primary source of funding borrowers, they are heavily regulated. Thus, their terms for any kind of loan, including a business loan, tend to be highly stringent in terms of determining an applicant’s eligibility or documentation requirements. 

B. Non-banking Financial Company (NBFC)

An NBFC provides lending and credit services but does not have the license to accept deposits. An NBFC is registered under the Companies Act, 1956. NBFCs cannot accept deposits but are allowed to lend and invest only. A few NBFCs may also provide innovative forms of credit instruments such as a Loan Against Securities. SMFG India Credit is one of India’s reputed NBFCs that is registered with the RBI.

Must Read: All You Need to Know about Business Loan in India

What is a Business Loan?

A business loan is taken up with the motive of financing a business’s short, medium, or long term requirements. These loans can be secured as well as unsecured. An unsecured business loan is very easy to avail and a flexible tenure for repayment can be chosen, depending on the lender’s policy.

How to choose between Banks and NBFCs for an Unsecured Business Loan?

The 2 options available for quick financing are- Banks and NBFCs. Let us understand which financial institutions will be beneficial for you. Here are some points that will help you make a choice:

1. Eligibility
   First, you need to understand the eligibility criteria of the lender and which one your business fits into. Accordingly, you can make a choice. Banks have stricter eligibility criteria as they are highly regulated and are thus limited in terms of the risk they can take. Whereas, NBFCs are more lenient in case of eligibility criteria. It usually differs from lender to lender. Some of the basic requirements are – being an Indian citizen, minimum annual turnover, credit score of 750 or higher, business existence for 3 or more years, documentation, and business stability.
2. Documentation
   Banks are very strict when it comes to paperwork. Usually, banks require heavier documentation when compared to NBFCs. They require minimal documentation for applying business loan and have an easy process.
3. Processing Time
   NBFCs usually take less time in processing as their eligibility criteria are low, and documentation or paperwork required is minimal thus, the time to process the loan is speedy. In banks, the process is usually lengthier and stretched, especially in case of applicants who do not have a current bank account with them.
4. Interest Rate
   The interest rate charged by a lender depends on several factors. Overall, NBFCs usually charge a higher rate of interest on business loans as compared to banks, since they assume a larger amount of risk. Here, SMFG India Credit’s business loan interest rate is a better option when it comes to NBFCs as they offer flexible options at the time of borrowing. 
5. Loan Disbursement
   Loan disbursement is quicker in NBFCs as they have minimal documentation and quick processing. The only exception here is for applicants who may already have an excellent relationship with their bank. Applicants who have a large current account balance, a stable income and an excellent credit rating may find it very easy to get access to quick funding in the form of an overdraft facility or a pre-approved business loan from their banks.

Conclusion

Both banks and NBFCs have their benefits and disadvantages. The decision depends upon your urgency and business requirement. Make an informed decision for avoiding future losses or regrets. Running a business can be difficult, and thus, having quick financial support will help your business sustain itself in the longer run.