A common dilemma faced by potential borrowers seeking a small business loan is—Where to shop for loans? Should they approach a bank or go with a non-banking financial company (NBFC)? Both are the financial entities which are offering excellent deals to customers with varied borrowing needs. What are differences between Banks and NBFC?
However, there are differences between the loan offered by banks and NBFCs, and therefore, a comprehensive understanding of both the options would help you find the answer to the question—from where to get a small business loan?
Banks and NBFCs: Key Differences
Non-Banking Financial Company or NBFC are not banks, but they are engaged in activities such as lending, similar to that of banks like providing loans, offering savings and investment products, trading in the money market, managing portfolios of stocks, transfer of money etc. Aditya Birla Finance Company, Sundaram Finance, ICICI Ventures are examples of popular NBFC’s.NBFC is divided into three categories:
- Asset Companies
- Loan Companies
- Investment Companies
While it is true that both banks and NBFCs offer financial services; there is a big difference when it comes to their regulations. While banks are regulated by the Reserve Bank of India (RBI), NBFCs are regulated as per the Companies Act, 1956.
Similarly, NBFCs can’t accept deposits or issue cheques or drafts, whereas, banks, on the other hand, can become the part of the payment and settlement system and thus, their account holders can send or receive money.
Banks Vs NBFCs
| Parameters | Banks | NBFCs |
| Regulation | RBI Banking Act | Companies Act |
| Loan sanction process | Usually stringent | Easy and fast |
| Interest rate benchmark | Marginal Cost of Lending (MCLR) | Prime Lending Rate (PLR) |
| Overdraft facility | Available with some banks, like SBI | Not available |
| Credit score requirement | Comparatively stringent | Relaxed |
| Probability of benefiting from the discounted interest rate | Less probability in case of current borrowers | Both the current and new customers have the high chances to benefit from the discounted interest rates |
Whom to Approach for a Small Business Loan?
Though it is true that NBFCs can only lend funds, many people still prefer to go with NBFCs when it comes to applying for a small business loan. For getting a small business loan, NBFCs are a better choice over traditional banks due to the following three reasons=
- Competitive Interest Rates= Bank loans are linked to the MCLR, which further links to various macro-economic factors, like RBI lending rates, international market, etc. However, NBFCs extend loans on the basis of the prime lending rate (PLR) which is not regulated by RBI. It offers a great amount of freedom to NBFCs who can vary their interest rates as per their ease and offer attractive interest rates to borrowers. It gives an edge to NBFCs over banks who can’t lend below MCLR slab.
- Loan Eligibility= NBFCs usually have a more relaxed approach towards loan eligibility,e., the amount that would be sanctioned to a borrower. Most of the banks do not fund the entire finance requirement, and a certain portion would have to be borne by the borrower. However, NBFCs may devise ways to help borrowers include the entire costs in the loan amount. In this way, a customer would be able to get a larger SME loan amount.
- Paperwork= NBFCs enjoy an impressive market share for small business loans. This they have been able to achieve through easy paperwork and processing requirements. Banks, on the other hand, are more stringent when it comes to paperwork. In case the applicant fails to submit the necessary documents, the bank can refuse to process the loan application as well.
However, NBFCs ask for the minimum documentation as the lender quickly processes and disburses the loan amount in a quick succession of time. Such feature is highly useful for those who have urgent funds requirements.
- Credit Score= Usually, banks do not provide loans to people who have a low or poor credit score. This is because banks consider such applicants as risky individuals who may default on their EMI payments. NBFCs, on the other hand, offer small business loans to even those applicants also who have low credit scores. However, it is necessary to note, NBFCs would charge a high interest rate to offset the default risk.
Conclusion
As finance is imperative for the growth of a small business, banks alone are not able to meet this requirement. Therefore, NBFCs are playing an important role in financing the needs of small businesses. Even in its financial stability report, the Reserve Bank of India has stated that the NBFCs are performing better than banks as their balance sheet is expanding by 15.5%.
Considering the benefits available, it makes complete sense to approach the NBFC to get a small business loan and grow your business.
I prefer NBFC for taking a business loan because we can compare the interest rates of different banks and get the best deal. I suggest https://www.loanonmind.com/business-loans-hyderabad for taking business loans.
Ravi kumar jha or mere pase 640000 ka chake hai
Thank You for providing this information..
Great Blog !!!
Banks have more stringent paperwork requirements for loans. This is not necessarily a bad thing for the loan seeker. In lieu of the greater scrutiny, he stands to receive an attractive interest rate. NBFCs are known for relaxed paperwork policies and faster processing.
Hi,
Thanks for providing the information. It is very useful information.