NBFCs Or Banks For Business Loans?

Taking a business loan is a smart move for any entrepreneur, not just for meeting day-to-day cash needs but also for expanding the operations and preparing for the future.

Once a business owner has decided to avail a loan, the big question that arises is from where should one take it. With rising competition, there are hundreds of lenders out there.

Since every business has its own bank account for financial transactions, banks become an obvious choice. Many a time because of existing banking history and relationship they also offer attractive terms for business loans.

But non-banking finance companies, or NBFCs, too, bring a competitive mix with their flexibility in loan terms making them another strong set of options for a borrower.

Both have their advantages and disadvantages and a business owner should pick a lender based on the circumstances and needs. Here are some factors to keep in mind:

Eligibility:

A business owner can opt for both banks or NBFCs for a loan but whether he/she can avail a business loan would depend on various factors. On this count, banks have much stringent conditions.

For instance, the country’s biggest private bank insists on the business to be in existence for at least three years and profit making for two years and with a minimum turnover of Rs 40 lakh. But NBFCs have a much flexible approach and easier norms. Even if a business is just six months old it can avail a loan from NBFCs.

Many banks also have a strict policy of filtering out business owners who have a credit score of under 750. But NBFCs have a lower threshold.

Interest Rates:

In general, banks have the advantage of a lower cost of capital and they can offer a lower interest rate. However, NBFCs could also come across with competitive rates. Banks’ interest rates are linked to Marginal Cost of Funds-based Lending Rate (MCLR), which is regulated by the Reserve Bank of India (RBI). Loans provided by NBFCs are synced to the Prime Lending Rate (PLR), which provides more flexibility.

Documentation And Processing Time:

Banks follow a set protocol with heavy paperwork. This does not only require more documentation to get a loan sanctioned but also add to the turnaround time of getting disbursement. This is even more so if one is looking to borrow from a bank with which the business does not hold a current account. NBFCs, in contrast, need only a few basic documents and typically have a much quicker process to sanction and deposit the loan amount in the account of the borrower.

Conclusion

On paper, a business loan can be availed from both banks and NBFCs but the stringent norms and high eligibility criteria makes borrowing from banks much tougher.

At the same time, banks can offer much better interest rates and swifter sanction if one holds a current account with it. But in general, NBFCs offer competitive rates coupled with much faster processing of the loan application at flexible terms of repayment. This makes them a strong choice if a business owner is looking to take debt capital.