Availing an SME business loan is not at all a tough task anymore. All you need to know is the eligibility criteria and the SME business loan documents. However, the main concern still remains whether to avail an SME loan from an NBFC or a bank. In this write-up, we have discussed how NBFCs are the best option for small business owners.
An NBFC or a Bank? This is a common dilemma faced by every borrower seeking small business loans. Should they approach a bank or an NBFC? Both are financial entities offer excellent deals on SME business loans. So, how to decide which one is the best?
Well, according to a few recent research and studies, NBFCs are surpassing the banks. The excellent performance by the NBFCs has helped them reach 15% customer satisfaction more than that of banks. The RBIs latest Financial Stability Report also suggests that the NBFCs financial profile has improved.
Nonetheless, as a borrower, you must have a comprehensive understanding of the difference between availing an SME loan from the two and then take a decision.
Banks vs NBFCs – The Key Difference
All the banks in the country are incorporated by the Banking Companies Act whereas NBFCs are regulated under the Companies Act, 1956. Although both offer the same services, NBFCs cannot accept demand deposits or issue cheques like banks. NBFCs are only engaged in activities like lending and providing business loans.
As with their functions, there is a lot of difference between the services offered by the banks and NBFCs. And these services only make the NBFCs better than the banks for SME business financing.
Whom to Approach for an SME Loan – Bank or NBFC?
Interest Rates: SME business loan interest rate is the first thing that comes to mind when one thinks of availing a loan for the business. It is an important aspect of all types of loans. NBFCs have been working on this aspect of SME loans and have brought down the interest rate. So, with the benefit of low interest rates, the business loan EMIs are brought down.
Quick Processing: At banks, the business loan eligibility is very stringent whereas the NBFCs offer SME loans at basic eligibility criteria. The NBFCs are lenient in this aspect. They offer the best business loan for small businesses and have made loan approval all the way easier, smoother, and quicker. They process SME business loans quickly and at competitive interest rates. With this, the funds are available to the small businesses at the time of need and they are not required to wait for a longer period.
Rules & Regulations: The NBFCs are regulated under the Companies Act and therefore, their lending regulations are not that stringent. This makes SME loans more accessible to small business owners. And again, with easy and fewer rules and regulations, the loan process is less complicated.
Credit Rating: A CIBIL score or credit score is one among the important business loan requirements. A CIBIL score of minimum 650 is required for availing a loan for the business. The banks are strict on this and they reject the loan applications of borrowers with poor credit rating. However, this case is not the same as the NBFCs. They have their own credit evaluation process and often evaluate the creditworthiness of the borrower in a holistic fashion. This again increases the chances of the business loan application being approved.
Collateral: A collateral is usually an asset having financial value, such as real estate, stocks & bonds, etc. These collateral backs the business loan and protects the lenders in case the borrower defaults the payment of the loan. Also, the amount of the collateral loans are always equivalent to that of the hypothecated asset. Banks usually offer collateral loan whereas NBFCs offer SME loans without collateral. Most small business owners do not have an asset to hypothecate or they do not wish to risk their asset. So, in this case, NBFC business loans are again the best option of them. Also, with no collateral, NBFCs do not require to compute the value of the asset and thus, they can approve loans much faster.
Online Application: When it comes to availing an SME business loan from the banks, you have to visit the bank branch in person to apply for a loan. You have to stand in long queues and wait for hours. Thus, you waste your time that you can dedicate to your business. Most NBFCs offer an online application form. You can apply for an SME loan online and there is no need for you to visit the lender’s office in person. Thus, you save time and also focus on your core business.
Paperwork: Banks require a long list of documents for business loan approval whereas the list of documents required by the NBFCs is minimal. In case you fail to submit an important document for SME business loan, your loan application can also be rejected. Also, with an online loan application form, you can upload the documents easily on their website and are not required to visit them in person with the documents.
Other Services: The only services offered by the banks are the SME loans and that too at stringent eligibility criteria, a long list of documents, tedious approval process, and high interest rates. However, NBFCs offer many other services as well along with a loan for the business. They offer their mobile Apps which can be downloaded easily from the Google Play Store. These Apps assist you in applying for loans and also notifies you about the upcoming EMIs. In addition, they also offer business loan calculator on which you can calculate your monthly EMIs before availing the loan. Thus, you can decide the best repayment tenure that suits your pocket.
An extra source of finance is imperative for the growth of small businesses. And alone banks cannot meet this rising demand. So, NBFCs are playing an important role in meeting the demand. And considering the above-mentioned benefits of availing NBFC business loans, it only makes sense to approach NBFCs for loans. There are many top small business lenders in the market which are offering loans for SMEs in India and at basic eligibility criteria and most competitive interest rates. So, you can search for the best business loan lenders in India and avail from the one that best suits your requirements.