Should You Choose Banks Or NBFCs For A Business Loan?

If you own a business, you must require finances to carry out your daily business operations. Several business loan options are available by several financial institutions to aid in the development and growth of your enterprise. The most common source of business loans is public and private sector banks. The other prevalent way of getting a business loan is through Non-Banking Financial Companies (NBFCs).

While Banks are a more secure way of obtaining business loans in India, NBFCs are also getting popular among people for loan facilities. Let us discuss in detail, compare the financial institutions, and decide which is better to get a Business Loan.

What is NBFC in India?

NBFCs in India are companies registered under the Companies Act, 1956 or Companies Act, 2013, which provide financing services. These companies offer loans and finance individuals, entities, or partnership firms by charging them interest. They work similarly to banks. However, the main difference between banks and NBFC is that the NBFC cannot issue cheques and demand drafts, self-drawn, as done by the banks.

Difference between NBFC and Bank

1. NBFC is a privately owned and operated company registered under the Companies Act, whereas Banks are the financial institutions authorised and recognised by the Government of India.
2. NBFCs are incorporated and controlled under the Companies Act,1956, whereas Banks are incorporated and controlled under the Banking Regulation Act, 1949.
3. NBFC allows foreign investment up to 100%, whereas Banks in India allow foreign investment up to 74% only in private sector banks.
4. NBFCs do not have to maintain reserve ratios, while the same is compulsory for banks.
5. NBFCs do not create any credit or provide transaction services, unlike banks that make credit and provide transaction services.

NBFC vs Banks: Which is Better for Business Loan?

1. Eligibility Criteria

NBFC loans for businesses have a pretty relaxed eligibility criterion compared to banks. Some NBFCs provide business loans to the applicants without demanding an ITR or proof of income, while the same is essential to get a business loan from a bank.

2. Rate of Interest

The rate of Interest on business loans is fixed and monitored by the Reserve Bank of India. Therefore, the banks cannot give loans below a specific interest rate. However, in the case of NBFCs, the interest rate is competitive and flexible, making it a viable choice for those seeking business loans.

3. Paperwork, Formalities, & Documentation

Banks have strict paperwork for providing a business loan. The applicant cannot deviate or choose not to give the document sought by the bank to get a business loan.

However, documentation and paperwork are minimal and flexible in the case of NBFCs. This is one main reason the MSMEs and startups prefer NBFCs more to get a business loan.

4. Loan Sanction Time

Since banks have lengthy loan approval and sanction processes, getting loans from them takes a lot of time. Due to a lenient application process, NBFC loans are easily approved and quickly sanctioned to the applicants.

5. Loan Disbursement

Loan Disbursement is way quicker in NBFCs than in banks. NBFCs have less documentation and minimal formalities, making the entire loan disbursement process seamless. However, due to a stringent process, loan disbursement is comparatively more time-consuming in banks.

Top 5 NBFCs in India

The leading Non-Banking Financial Companies in India are:

1. Bajaj Finance Limited
2. Shriram Transport Finance Company Limited
3. Aditya Birla Capital Limited
4. L&T Finance Holdings Limited
5. Mahindra and Mahindra Financial Services Limited 

Conclusion 

It can be thus concluded that NBFCs are a better and more popular choice to get a business loan. Both these financial institutions have their own advantages and demerits. If you’re looking for a quick and easy loan, you should go for NBFC. However, if you’re looking for reliable and safer loan options, you must choose a bank. Banks are the traditional method of getting loans and it has their own perks. 

Therefore, you must wisely choose between both options and make a decision carefully.

Pradhan Mantri Matsya Sampada Yojana – Objectives & Influence on Economy

  Previous Blog

What Is The Difference Between Finance Lease Vs Operating Lease?

Next Blog