NBFCs Or Bank Business Loans?

Business owners seek loans to fulfill their immediate cash needs. It is a common way to raise funds easily and quickly. While the application processes are easy, the difficulty lies in selecting the ideal financial institution (source of funds).

This article will lay out the points to determine whether NBFC business loans or bank business loans are the right choice for you.

What Are Business Loans?

A business loan fills short, medium, or long-term funding requirements. Depending on the loan policy, you can choose a secured or unsecured loan with flexible tenure and repayment terms. In a secured loan, you must pledge some collateral against the required loan amount. Lenders sanction unsecured loans based on your credit history.

What Could Be The Sources Of Business Loans?

Business loans are typical among small businesses with conventional products or services. Primarily, there are two sources of business loans: a traditional bank or a non-banking financial service (NBFC).

1. Banks:

The primary business focus of banks includes accepting deposits and processing loans. Banks are highly regulated institutions and perform lending activities through capital markets as they use publicly deposited money to lend loans. They are registered under the Banking Regulation Act, 1949.

2. NBFC:

Non-banking Financial Company (NBFC) offers lending and credit service to the public. However, they lack the license to accept deposits. They are registered under the Companies Act, 1956.

How To Choose Between Banks And NBFCs For A Business Loan?

To select bank vs NBFC to avail of a business loan, business owners should consider these factors:

1. Eligibility

Different lenders have different eligibility criteria. You need to choose the one that fits your business the best. Banks are highly regulated and have stricter eligibility criteria. This measure makes them less likely to lend to a risky business profile. On the other hand, NBFC business loans have much more lenient eligibility criteria, like a good credit score, being an Indian citizen, minimum turnover, etc.

2. Required Documents

NBFCs require minimal documentation whereas banks need more documents to approve a business loan. NBFCs own a majority of unsecured small business loans. Offering business loans with minimal and simple paperwork, the largest micro and small businesses rely on NBFCs for their financing needs. Banks, on the other hand, follow strict regulations.

3. Interest Rate

Since NBFCs take a higher risk by being lenient on eligibility criteria, they usually charge a higher interest rate to its borrower. On the flip side, bank business loans offer a comparatively lower interest rate.

4. Loan Disbursement

With minimal documentation and quicker processing, NBFCs disburse the loan more quickly. In the case of banks, applicants with larger deposits, and excellent credit scores may find it easy to get loans from banks.

5. Loan Processing Time

Another influential factor when choosing a lender is the loan processing time. Everyone wants quick money, and when it comes to business financing, you certainly do not want to delay. NBFC requires simple eligibility criteria and minimal documentation, making the loan approval process fast, efficient and smooth. Banks, in contrast, take longer to process business loan applications as they follow a lengthy screening process.

Both banks and NBFCs have their pros and cons. You can select the institution based on your urgency and business requirements. Compare the offerings thoroughly and make an informed decision for your business.

Apply For Business Loans With IIFL Finance

IIFL Finance is a leading instant business loan provider. We provide quick loans for small businesses with small financial requirements up to INR 30 lakh with minimal documents. You can check the interest rate at your nearest IIFL Finance branch or online and apply for an IIFL Finance business loan today!

Frequently Asked Questions

Q.1: How important is a credit score for a business loan?
Ans: Credit scores play a crucial role in loan sanctions. The higher the credit score, the more favourable the loan terms. Banks take credit scores more seriously, while NBFCs can get lenient. A credit score above 700 is considered good to have the power to negotiate the loan terms.

Q.2: Who processes the loans faster- NBFCs or banks?
Ans: Typically, NBFCs process loans faster than banks because of their minimal documentation requirements and lesser eligibility criteria. The procedure is more prolonged and stretches more in reviewing in banks, especially for applicants without a current bank account with the same financial institution.