To run a business, we need a constant flow of funds. This is possible with the help of business loans. NBFCs and Banks both provide business loans, but which one is advisable to go for? Banks and Non-Banking Financial Companies are money lending institutions. A business person can take the help of these money lending institutions and borrow business loans for smooth flow and growth of their business.
But the question that arises is which one is better for business loans. When it comes to choosing banks or NBFCs, studies have shown that NBFCs are doing better. Even the RBI agrees to that. One of the reasons why most borrowers are confused is because both financial mediums serve the same purpose. If you are business loan eligible, you can take a business loan from any of them. But the most preferred financial medium is NBFCs and not banks.
Here’s why NBFCs are better than banks:
Fast Process of Getting Loans:
Although NBFCs, like banks, don’t have the facility of demand deposits, most borrowers prefer NBFCs over banks. This is because the process of getting a loan is much faster and more hassle-free than it is in traditional bank loans. In a traditional bank loan, you have to go through many processes, and only then do you get the loans you are seeking. Even though NBFCs provide higher interest rates, most people prefer NBFCs over banks. It would help if you met the eligibility criteria to get a loan from the bank.
Rules and Regulations:
NBFCs fall under the companies act 1956. They have comparatively fewer rules and regulations as compared to the banks. The rules and regulations are way too rigid in banks, so most people prefer NBFCs over banks.
Documents and Paperwork:
If you got a traditional bank loan, you would have to go through a lot of paperwork to get the loan. You cannot escape the paperwork in a traditional bank loan. This is one of the reasons why business persons prefer NBFCs over banks for business loans. They provide loans with minimum paperwork. The process is quicker as compared to the banks.
Lending money to borrowers with poor credit scores:
To be eligible for business loans, you need to have a good credit score. You need to work on your CIBIL score, and only then will you be suitable for a business loan from the bank. However, this is not the same with NBFCs. Here you can get loans even with a low credit score. You need not have to be creditworthy. Although the interest rates are higher, you get loans quickly and with a low credit score.
Rate of interest on the loans:
Comparing the market rates of interest, NBFCs have also lowered down the interest rates. This is an additional benefit to the borrowers. However, if you have a poor CIBIL or credit score, you may have to pay a higher interest rate to balance the risk they are taking.
The Bottom Line:
Business loan eligibility is important to get a business loan. Compared to traditional bank loans, you must choose NBFCs as you can get loans quicker, with fewer documentations and formalities, and even with a low credit score and less process to go through. Check out more on Finserv MARKETS.
