NBFC or Bank: Which is Better for Business Loans?

27 Jan 2021

Over the last decade, banks were the initial choice of individuals and businesses when it comes to taking loans. However, it is not the same anymore. NBFCs (Non-Banking Financial Companies) have evolved tremendously in India, owing to its vast benefits. There is no doubt that NBFCs are the first choice of businesses today. It is majorly because of the enormous advantages that NBFCs like OfBusiness offers in business loans. Nowadays, small and medium-sized enterprises are contributing hugely to the economic growth of the nation. Therefore, small businesses are the ones that have more financial requirements. OfBusiness was established to help small enterprises meet the financial need for working capital and raw material procurement.

NBFC vs. Banks – What’s the Difference?

While both are financial service providers in one form or another, there are significant differences between them. Although the banking sector has evolved rapidly, the process of availing business loans remains the same. You can certainly imagine the tiring process of getting a loan approved from banks. NBFCs have taken the lead in these areas by introducing quick and instant business loans.

Here are some of the factors that differ when it comes to NBFCs and banks.

Quick disbursal of funds

If you opt for banks for business loans, you will waste much of your working days. It is because of the tiring paperwork and processes involved behind that. The massive paperwork in the banks makes the approval and disbursal process lengthier. As compared to this, the lending norms of NBFCs are smooth. They have relaxed requirements and minimum documentation. With this less complicacy in loan processing, NBFCs are said to lend higher satisfaction among customers.

Simple eligibility criteria

Opposite to banks, NBFCs follow a relaxed approach to loan eligibility. They accord the customers more straightforward and faster financing. Despite having a low credit score, one can easily qualify for a loan from an NBFC. Also, lending 100% loan amount provides the NBFCs with an edge over traditional banks. Many of these financial institutions disburse the entire loan amount without requiring any collateral.

Competitive Interest Rates

Interest rate is one of the main concerns for loan seekers. And this is where the NBFCs have surpassed banks. Compared to traditional banks, NBFCs give competitive rates of interest on business loans. Their base interest rate is stipulated based on the prime lending rate, which is not regulated by the Reserve Bank of India. Non-financial institutions enjoy greater flexibility and can vary their rates of interest in SME loans.

Less Rules and Regulations

As NBFC are under the Companies Act, the rules and regulations for lending are not as stringent as banks. It supports borrowers to get loans quickly. And the less complicated loan processing makes borrowers highly satisfied. Of course, the default risk is high with NBFC; interest rates and other charges will be priced according to the NBFC. Even the loan amount approved will be relatively lesser than the collateral value. This is due to the high risk of default.

Minimum documentation and paperwork

NBFCs possess an incredible share of non-security small business loans. They can garner the attention of loan seekers due to minimal documentation and paperwork. On the other hand, Banks follow more stringent rules and regulations when it comes to paperwork. If a borrower fails to furnish the required documents, banks may refuse to process the loan application.

Key Takeaways

Considering the benefits mentioned above, it is evident that NBFCs play a critical role in boosting the country’s economy. By fulfilling MSMEs’ credit requirements, the non-banking financial institutes tend to spur the growth of essential areas requiring requisite change. Moreover, concerning lending in India, NBFCs outperform traditional banks in terms of ease of offering business loans. Even the financial stability report issued by RBI has revealed that the performance of NBFCs has improved notably.