Banks or NBFC: Which is better for Business Loans?  

The expansion of Small and Medium Enterprises (SMEs) in India has resulted in the increasing popularity of business loans. A large number of entrepreneurs avail business loans in order to manage the daily expenses of their organization. Also, the expansion of a business requires a large amount of capital and business loans are considered to be a great financing option for the same. Due to the tremendous growth of the Banking and Finance sector in recent years, entrepreneurs have a wide range of options to avail a business loan. Of all the choices available, business owners usually get stuck between a bank and NBFC. Here we evaluate several aspects of both the financial institutions that can help entrepreneurs make an informed decision for their business.

Interest rates

  • Bank loans are linked to the MCLR, i.e, the minimum interest rate below which a bank is not permitted to approve a loan. Additionally, bank loans are further linked to macro-economic factors such as RBI lending rates, international market, etc.
  • On the other hand, NBFCs provide loans depending on the prime lending rate (PLR) which is not regulated by RBI. Therefore, NBFCs can implement some amount of flexibility as far as the interest rates are concerned. NBFCs offer multiple credit product depending upon the eligibility of the borrower. Hence, NBFCs are a better option for entrepreneurs who fail to satisfy the loan eligibility criteria of banks.

Loan amount

  • Most banks do not sanction the entire business loan and fund only a certain portion of the credit required.
  • With NBFC, entrepreneurs can avail the entire business loan. Some NBFCs also provide business loans with a pre-approved loan limit. This allows the entrepreneurs to easily withdraw funds in case their business runs out of capital.
  • Another advantage of a business loan for NBFCs is that the interest is charged only on the amount utilized and not on the entire loan amount. This reduces the monthly installments significantly.

Documentation

  • The business loan eligibility and documentation process with most banks are stringent. If entrepreneurs are unable to provide required documents, banks may refuse to process their loan application
  • NBFCs have minimum documentation and the business loans are processed much faster than a bank.

Credit Score

  • In order to avail a business loan from a bank, borrowers are required to have a good credit score. This is because businesses with a poor credit score are deemed risky.
  • On the other hand, NBFCs may accept a small business loan application even if the credit score is not too good. However, it is to be noted that a business loan availed with a low credit score will always have a comparatively higher rate of interest.

While availing a business loan, borrowers should calculate their EMI beforehand with the help of an online EMI calculator. This will allow them to plan their monthly budget wisely. Lastly, it is recommended that business owners should read the terms and conditions of the loan agreement carefully before signing it. This will help them avoid any inconvenience in the later stage.

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