If you’re a business owner, you know how important it is to have access to money to keep your business running smoothly. Different financial institutions offer a range of business loan options to help you grow and develop your business.
Public and private sector banks are the two most popular ways to get business loans in India, while the second-most popular option is an NBFC. Banks are still the go-to source for business loans, but more and more people are turning to NBFCs for loan facilities. So, should you choose a bank or NBFC, or a business loan? This article will help you understand which one would suit you the best.
1. Eligibility Criteria
When it comes to getting a business loan, banks usually have strict rules they need to follow to approve it. There’s a lot of paperwork and checks that need to be done to make sure the amount is legit. They also require a good FICO score, experience running a business, and an annual turnover. It’s no surprise that you’ll need a lot of time to get through all this.
On the other hand, NBFCs don’t have as strict an endorsement process for credit applications and they usually stick to a smoother cycle to get their clients the money they need. An NBFC makes it much easier for people with low credit scores and not much business experience to get approved for a loan.
2. Process Of Documentation
Most of the small business loans that are unsecured are held by Non-Banking Financial Companies (NBFCs). Because they provide business loans with little to no paperwork and documentation, most micro and small businesses turn to them for their financing needs.
On the other hand, banks have strict rules about what they do and don’t do when it comes to paperwork. If you don’t submit the right paperwork, your loan could be denied.
3. Rate Of Interest
If you’re a business owner, you know how annoying it can be to pay interest on your loans. The EMIs add up quickly as interest rates go up. But with a loan from a non-banking company like an NBFC, you don’t have to worry about that. They offer low-interest rates compared to banks, which makes it easier for you to get the loan you need.
Plus, because they’re based on Prime Lending Rate (PLR), which isn’t regulated by the RBI, their interest rates can be low. That means they have more freedom to change the interest rates of their business loans to attract more customers. Plus, they charge lower loan processing fees and other fees compared to banks.
4. Credit Score
When applying for a business loan, a credit assessment will be conducted by the lender to determine whether or not they should approve the loan. Unlike banks, Non-Banking Financial Corporations (NBFC) employ a more thorough credit assessment process. Abhay Bhutada, MD of Poonawalla Fincorp believes that expanding operations is an important business requirement. To make this convenient for businesses, an unsecured business loan can come in handy.
Rather than solely evaluating the creditworthiness of the applicant, they will also consider other elements such as the stability of the business, the outlook of the industry, and the annual turnover. Whereas banks adhere to stringent credit assessment criteria. Advance applications will be considered if the applicant has a positive FICO rating.
5. Processing Time
The loan processing time is a key factor to consider when selecting a lender. After all, no one desires to have to wait a long time to access financial resources in the event of an emergency.
As Non-Banking Financial Companies (NBFCs) require a straightforward set of eligibility criteria and require minimal documentation, their approval process is swift, efficient, and smooth. On the other hand, banks adhere to a lengthy verification process, resulting in a longer processing time for business loan applications.
Final Thoughts
Banks have a bit of a head start when it comes to lending to businesses, but it’s important to keep in mind that banks are typically more established and dependable. So, when it comes to deciding which bank or NBFC to go with, there are pros and cons to consider.
