February 23, 2023

5 reasons why NBFCs are better than banks for business loan in India

Business loans are a popular financing option for entrepreneurs and small business owners as they typically do not require collateral. The process of obtaining a business loan has become more convenient and accessible in recent years, with the availability of instant business loans online.

Additionally, as a borrower you now have a wider range of options to choose from when it comes to securing a business loan. You can choose to apply for a loan from a traditional bank or opt for a modern lender such as a Non-Banking Financial Company (NBFC).

Banks have a long history of serving as a trusted source of financing for businesses and individuals alike. They continue to offer a wide range of loan products to meet the diverse needs of their customers. However, today NBFCs offer a user-friendly loan application process and competitive interest rates, making it easier for borrowers to secure instant business loans. Also, the terms and conditions of NBFC business loans are often more favourable than those of traditional banks.

Banks vs NBFCs- What’s the Difference?

Banks and NBFCs both offer financial services, but have differences in how they run their business, operate, and follow regulations.

A bank is an authorised government financial institution that is granted a banking licence. Banks accept deposits from customers and provide loans and other forms of credit to individuals and small businesses. They also offer a range of financial services, including savings accounts, checking accounts, and investment products.

NBFCs provide similar financial services as banks but do not have a banking licence. Unlike banks, they do not accept deposits from customers. Instead, they provide loans and lines of credit to individuals and small businesses. NBFCs are typically more flexible in their operations and offer tailored financial solutions to their customers.

Here’s Why NBFCs are Better Than Banks for Business Loans

NBFCs offer a range of benefits over traditional banks, when it comes to getting instant business loans. Here are 5 reasons that explain in detail why you should consider opting for a business loan from NBFC rather than a bank.

1: Loan Process

Banks are highly regulated financial institutions that operate within a set of strict rules and guidelines set forth by government agencies and industry organisations. This results in banks being highly cautious in their lending practices and limited in the amount of risk they can take. They also have guidelines in place for loan amounts, repayment terms, and interest rates. Thus, banks may reject loan applications from business owners who do not meet their strict criteria, even if the business has potential for growth.

Whereas, NBFCs offer more relaxed and flexible lending norms, making it easier and faster for customers to access financing. While the lending criteria of NBFCs may vary from one lender to another, there are some basic requirements that a business owner must meet.  To be eligible for an instant business loan from an NBFC, you must be an Indian citizen and have a minimum annual business turnover. Additionally, a satisfactory credit score, a stable business, proper documentation and positive future business prospects may be necessary.

2: Documentation and Paperwork

The business loan application process offered by the banks can often be time-consuming due to the extensive paperwork involved. Banks adhere to strict regulations when it comes to document submission, which makes the approval and disbursement process more drawn out. If a borrower is unable to provide the necessary documents, his/her loan application may be rejected by the bank.

On the other hand, NBFCs offer a much more streamlined lending process. They have less stringent requirements and a lower amount of paperwork, making it easier for applicants to obtain an instant business loan. In addition, many NBFCs now offer an entirely digital process, allowing borrowers to easily submit their information on the go. You can upload bank details and KYC documents online, without having to worry about physically visiting a bank or handling stacks of papers.

3: Disbursal Time

With banks, the disbursal process can be time-consuming and lengthy due to the extensive paperwork and documentation. This includes preparing financial and legal documents, as well as detailed information about the business and its operations. Additionally, banks are rigorous in their verification process. They conduct thorough checks on the information provided by the borrower and verifying the authenticity of the documentation.

NBFCs offer a simpler and more streamlined loan approval process, with minimal eligibility criteria and documentation requirements. Many leading NBFCs approve business loans often within an hour of submitting your loan application.

Once approved, the loan amount can be credited to your account usually within 48-72 hours. For example, if you apply for an Indifi business loan for an amount up to ₹1 Crore, it can be processed within 48-72 hours.

4: Credit Evaluation

When you apply for a business loan, the lender evaluates your creditworthiness to determine whether to approve your request. It carries out a comprehensive credit evaluation process to assess your ability to repay the loan based on your past credit history. Banks follow strict guidelines and consider applications of a borrower that has a healthy credit score of 750 and above.

NBFCs have a more comprehensive approach to credit evaluation. They don’t solely rely on the credit or CIBIL score. Instead, they have a well-established system in place that takes into account various factors to determine a borrower’s creditworthiness. They look at financial stability and performance of the industry in which the borrower operates. NBFCs also consider bank statements, turnover and borrower’s Income Tax Returns (ITRs) when evaluating an instant business loan application. For example, the minimum CIBIL score required for an Indifi business loan application is 650 and above.

5: Interest Rates

Interest rates on business loans are a critical concern for loan applicants as they significantly impact the monthly loan repayment amount. Higher interest rates make the loan instalments more expensive and increase the overall burden on the borrower. Banks are bound by the Marginal Cost of Funds based Lending Rate (MCLR) regulations imposed by the RBI. Therefore, banks cannot lend below the MCLR.

NBFCs, as the name suggests, are not regulated by the Reserve Bank of India (RBI) and hence have more flexibility when it comes to lending rates. Hence, they have a different approach to lending. The loans that NBFCs offer are based on the Prime Lending Rate (PLR), which is not regulated by the RBI. This gives NBFCs a significant advantage over banks as they offer loans at competitive interest rates and cater to a larger section of the market.

In conclusion, banks and Non-Banking Financial Companies (NBFCs) both offer unique advantages when it comes to taking out a business loan. While banks may offer more traditional and established options, NBFCs can provide faster disbursal times and may have less stringent criteria. However, it’s important for each individual business to evaluate their own needs and financial situation before deciding which option is best for them.