Business Loan From A Bank Or Nbfc – Which One Should You Choose?

In this competitive environment, the demand for business loans keeps rising. By the fiscal year 2019, the government Mudra loan scheme disbursed over Rs. 8.6 lakh crore loans within just four years of its launch. Moreover, many investors acquired these loans with the help of banks and Non-Banking Financial Institutions (NBFCs). The popularity of business loans in India increases day by day.

As a business owner, the need to avail loans to cover pending or future expenses must have boggled your mind several times. If you have ever thought about availing a business loan, you need to consider several aspects between banks and NBFCs to get the maximum benefit. 

Below are some key differences in business loans in India from NBFCs and banks.

Key Differences In Business Loans From Nbfcs And Banks are:

• Interest Rates

Banks and NBFCs vary their business loans depending on the stability of the business, and individual profiles. However, generally, banks offer a much lower interest rate for business loans as compared to NBFCs. While banks provide interest rates typically starting from 16% for business loans, NBFCs like Fullerton start their interest rate from 17% for business loans.

• Loan Amount

The loan amount is essential for a business loan. Each penny and its interest can eat away your investment. Here, underfinancing and over financing can be a curse for successful business operations. However, if you are looking for a large sum and secure credit, you should consider opting for a bank loan.  

Many investors prefer to borrow from NBFCs in most cases. It is mainly because most businesses do not require such large sums, except in times of crisis. Many NBFCs provide a pre-approved business loan for businesses. In such schemes, companies can withdraw the much-needed investment without any time without any paperwork. These schemes are ideal for many companies who face uncertain risks, and decisions in their path to progress.

• Collateral

Many banks require extensive collateral for securing loans. It is because stricter RBI regulations, and more deposit insurance provisions in case of uncertainties like inability to pay back. On the other hand, NBFCs operate as private entities that invest in creditors and undertake the risks on their terms.

What this means for investors is, NBFCs like Fullerton offer schemes like collateral-free loans up to Rs. 50 lakh. Most banks will require extensive documentation and thorough background checks before ensuring credit. Therefore, if you are coming out of a lean patch in business, and are unable to secure loans from banks at low-interest rates, NBFCs will generally serve you well.

• Processing Fees

Since NBFCs rely more on personal relationships and less extensive security checks, these often offer low processing fees. For example, most banks vary with their processing fees for online business loans between 3%. On the other hand, most NBFCs will vary their processing fees between 2-3%. While many banks claim that their processing fees are competitive with NBFCs, in reality, that’s rarely the case.

• Eligibility and Duration

As mentioned earlier, NBFCs operate as private entities under RBI guidelines and are more flexible with their loan eligibility. This flexibility also results in faster-documentation and speedy approvals for business loans. Approval for online business loans has gotten much quicker over the years as compared to the conventional paper-based process.

Online business loans from banks still take over 15-45 days for approval due to stringent document trail. On the other hand, you can experience quick disbursal of credit from NBFCs with plans like pre-approved credits, among others. Apart from this the business loan eligibility for the banks and NBFCs are mostly the same but there may be slight differences in the documents requirements.

• Loan Tenure

Both NBFCs and banks offer attractive tenures for business borrowers. Generally, these range between 6-36 months for most enterprise owners. However, banks here provide a slight advantage with repayment schedules, as high as 48 months in some cases.  

Conclusion

Banks and NBFCs are both stepping up ways to serve business customers better. It includes 24/7 customer service, online documentation, among other options. Before opting for a business loan from NBFCs and banks, you should understand the fundamental difference between banks and NBFCs as outlined by RBI. Under the ambit of RBI regulations, banks are responsible for creating credit, with their accountability for risks to the public. NBFCs are private entities that can offer flexible business loan options as they undertake the financial responsibility of providing credit, mainly at their own risk. 

So, if you have a perfect credit score and stable business loans, you will find attractive options at banks. But in case if you need quick loan approval, low credit score values, or one during your lean patch, you are likely to be welcomed at NBFCs. NBFCs find a way to provide the desired loan to the customers.