Bank Business Loan vs NBFC Business Loan: Key Differences, Pros and Cons
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Selecting a bank vs NBFC business loan is one of the most common choices that businesses make when seeking external funding. Although both banks and NBFCs offer financing services to MSMEs, they may differ in terms of the products they offer, as well as the evaluation and application process.
An NBFC business loan may suit businesses seeking online application and non-collateral loans while banks have more product options such as working capital facility and collateral-backed loans.
The purpose of this bank loan vs NBFC loan comparison guide is to provide an insight into how banks and NBFCs differ from each other in terms of eligibility, documents, collateral requirement, processing, and repayment. Moreover, this article also tells you how to find out the registration of the NBFC before sending any business information.
Bank vs NBFC Business Loan: Side-by-Side Comparison
|
Parameter |
Bank |
NBFC |
|
Regulatory status |
Regulated banking institution |
Non-Banking Financial Company (NBFC) registered with the Reserve Bank of India (RBI) |
|
Application process |
Branch-led, relationship-based or digital, depending on the product |
Often digital or assisted, depending on the lender and product |
|
Interest and charges |
Product and borrower-profile specific |
Product and borrower-profile specific |
|
Collateral |
Secured and collateral-free facilities may be available |
Secured and collateral-free facilities may be available |
|
Credit assessment |
May consider credit history, financial records, banking behaviour and repayment capacity |
May consider credit history, banking data, GST information, cash flows and repayment capacity |
|
Documentation |
Depends on entity type, facility and credit assessment |
Depends on entity type, facility and credit assessment |
|
Loan amount and tenure |
Determined by lender assessment and product guidelines |
Determined by lender assessment and product guidelines |
|
Processing and disbursal |
Subject to appraisal, verification and sanction conditions |
Subject to appraisal, verification and sanction conditions |
While the most important distinction to be made between a bank and an NBFC business loan is not necessarily in terms of who offers better speed or cheaper terms, the differences can arise in how the lending institution assesses the risk and evaluates the business as well as structuring the repayments.
Banks could follow process-oriented models, whereas some NBFCs could have digitized their application process for greater convenience of borrowers. Nevertheless, being quick on the application process doesn’t ensure that the loan will get approved.
Note: Interest rates, fees, collaterals needed, duration and processing time may vary for each lender and each loan product. The loan terms and conditions are available in the Key Fact Statement (KFS) of the sanctioned loan.
NBFC Business Loan Eligibility: Who Can Apply?
Eligibility for a NBFC business loan depends on the lender's product requirements and underwriting policy.
While requirements may vary across lenders, assessment can include factors such as:
- Business constitution
- Length of operations
- Credit history
- Banking behaviour
- GST records, where applicable
- Turnover and cash-flow position
- Repayment capacity
For example, IIFL Finance currently publishes business-loan eligibility criteria that include a minimum operating history and a minimum credit-score requirement. These are product-specific criteria and should not be interpreted as industry-wide standards.
Credit Score Context
|
CIBIL Band |
General Credit Context |
Possible Assessment Consideration |
|
Below 650 |
May indicate a weaker credit profile |
May involve additional review |
|
650-700 |
Moderate credit profile |
Assessment may depend on cash flows, repayment history and lender criteria |
|
700 and above |
Often considered a stronger credit profile by many lenders and credit-market participants |
May support assessment, although approval is never guaranteed |
Credit scores provide context during underwriting but do not determine the outcome on their own. Lenders may also review business performance, repayment history and supporting documentation.
Note: A credit score does not create an entitlement to credit, a specific interest rate or a particular loan amount.
Documents Required for an NBFC Business Loan
The documents required for a NBFC business loan can vary depending on the business structure, loan type and assessment process.
Commonly requested documents may include:
- Identity and address proof
- PAN of the borrower and co-borrower, where applicable
- Recent business bank statements
- GST registration and returns, where applicable
- Business registration or constitution documents
- Additional financial information requested during assessment
Many lenders now support digital document submission. However, digital submission does not replace verification requirements, and additional documents may still be requested before a decision is made.
Pros and Cons of NBFC Business Loans vs Bank Loans
NBFC Business Loans
Potential Advantages
- Digital and assisted application channels may simplify document submission.
- Certain lenders may offer collateral-free products, depending on policy and eligibility.
- Alternative data sources, such as banking and cash-flow information, may form part of the assessment process.
- Some products are designed specifically for MSMEs and self-employed borrowers.
Possible Considerations
- Pricing and product structures can differ significantly between lenders.
- Product availability and tenure options may vary.
- Eligibility criteria can differ across loan programmes.
Bank Business Loans
Potential Advantages
- Banks may offer a wider range of lending products, including term loans, working-capital limits and secured facilities.
- Existing banking relationships may provide additional transactional history for assessment.
- Businesses may have access to multiple credit products within the same institution.
Possible Considerations
- Documentation requirements may vary depending on the facility.
- Certain facilities may involve detailed financial assessment and security review.
- Processing requirements differ across products and institutions.
When evaluating a bank vs NBFC business loan, reviewing the APR, processing charges, foreclosure terms, repayment schedule, security requirements and total repayment obligation often provides a more complete comparison than looking at the headline interest rate alone.
Note: Product features and costs vary by lender. The latest KFS, sanction letter and loan agreement govern the final terms applicable to the borrower.
How to Verify an NBFC Before Applying
Before submitting business information or KYC documents, it may be useful to verify whether an NBFC is registered with the Reserve Bank of India.
A simple verification process may include:
- Visit the RBI's NBFC section and review the list of registered NBFCs.
- Match the lender's legal name with the name appearing in the RBI records.
- Review any publicly available list of cancelled Certificates of Registration where relevant.
A valid registration confirms that the entity is authorised to conduct regulated NBFC activities. Registration should not be interpreted as RBI endorsement of a particular lender, interest rate or loan product.
When Might Businesses Consider an NBFC or a Bank?
There is no universal answer to which is better bank or nbfc because business requirements differ.
Some businesses may focus on:
- Required loan amount
- Repayment schedule
- Collateral availability
- Documentation requirements
- Processing expectations
- Working-capital requirements
- Existing financial relationships
The most useful comparison usually comes from reviewing like-for-like written offers for the same funding requirement.
In a bank loan vs NBFC loan decision, the most suitable option is generally the one whose documented terms align with the business's repayment capacity, financing requirement and operational needs.
Conclusion
Both banks and NBFCs have an important role in facilitating MSMEs' access to funds. Even though both may apply various criteria and offer different products, each of them will be able to offer business loans according to the borrower’s characteristics and the amount of money needed.
Eligibility, documentation, credit score, registration, and other important features of NBFC and banks have been considered in this comparison. Checking Key Fact Statement, sanction conditions, and the overall cost of borrowing will give a better basis for comparisons.
Frequently Asked Questions
Which NBFC will provide a good business loan in India?
It would be unfair to suggest an NBFC as there is no NBFC which can offer good business loans in all situations, as per the loan amount required, repayments, qualifications, fees, tenure, and total cost of borrowing.
Who can avail an NBFC business loan?
Each NBFC has different qualification criteria to assess a business loan application. Qualification will depend upon the age of the business, nature of the business, credit score, conduct in banking, GST status, turnover and repayment ability.
How can the businesses check if the NBFC is registered?
The borrowers can compare the lender's company name from the list of registered NBFCs published by the RBI.
Which NBFC provides a business loan most easily?
Each NBFC follows different criteria to approve business loans. None of the NBFC can be said to be providing an easy approval of business loans as each has its own criteria for credit assessment and borrower’s profile.
What credit score is generally considered favourable for an NBFC business loan?
There is no single regulatory minimum credit score applicable across all lenders. Many lenders consider credit scores alongside business performance, repayment history and financial records. A score above 700 is commonly viewed as a stronger credit profile by many market participants, although it does not guarantee approval.
Disclaimer : The information in this blog is for general purposes only and may change without notice. It does not constitute legal, tax, or financial advice. Readers should seek professional guidance and make decisions at their own discretion. IIFL Finance is not liable for any reliance on this content. Read more
