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LINES OF CREDIT: NBFC VS. TRADITIONAL BANKS

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Posted on
Jun 20, 2019

Today markets have opened up a lot of funding opportunities for SMEs and MSME. With a plethora of loan options available at convenience, borrowers are often faced with a dilemma of choosing between a traditional bank and an NBFC. However, this issue is much of concern when a borrower opts to avail the business line of credit financing. Deciding between a bank and an NBFC is complicated due to similarities in the roles of both financial intermediaries. Yet some large differences govern the loan sanctioning process of both financial institutions. 

Although, before moving on to decide between an NBFC and bank, it’s important to review a small business line of credit loan products. It is pertinent to assess how it works and why it should be applied for. 

WHAT IS BUSINESS CREDIT LINE?

A line of credit business loan is a revolving credit facility. Under this, a borrower is issued an agreed amount of capital, for a specific duration. Once the business loan is sanctioned business owner becomes liable to use capital as and when required. There is no compulsion to withdraw and use the loan amount soon after approval. The loan amount can be borrowed as per convenience until it reaches its cap limit. Another attractive feature of these loans is that the interest applicable on your loan is levied only based on the withdrawn amount. Moreover, when your principal amount is paid back you again become eligible to apply for the small business line of credit loan. 

ADVANTAGES OF BUSINESS CREDIT LINE

  • Interest paid only on funds drawn. 
  • Capital available for use whenever needed. 
  • Repaid only when credits are drawn. 
  • Covers seasonal fluctuations. 
  • Bad credit scores are also considerable. 

HOW TO PICK ONE WHILE SHOPPING FOR A CREDIT LINE BETWEEN BANKS V/S NBFCS?

While choosing to pick between a bank and an NBFC for a line of credit, a borrower needs to assess various factors affecting loan process and repayment. However, for some, it may come down to selecting institution which offers lower interest while for some it may be completely reliant on the maximum allowed loan capacity. Thus, there are a lot of differentiators between a line of credit from a bank and a line of credit from an NBFC. To provide you a better insight, here are the key differences:

Interest Rates

One of the greatest advantages of getting a loan from an NBFC is the lower interest rate. NBFCs offer an unsecured business line of credits at the most competitiveinterest rate. Unlike traditional banks, where interest rates are linked to MCLR (Marginal Cost of Lending Rate), the minimum interest rate below which a bank is not permitted to lend, NBFCs follow flexibility in increasing or decreasing interest rates. 

Credit Score Requirements

Availing line of credit from a bank requires having a high credit score. While this is not the case with NBFCs. The non-banking financial institutions aren’t rigid about extending credit facilities to SMEs and other enterprises with a low credit score.

Loan Eligibility

NBFCs are not tightly regulated as banks; thereby they follow a relaxed approach towards eligibility for a line of credits. Also, most banks do not issue the entire loan amount; a certain portion of funds might be required to be arranged by the borrower. Contrary to this, NBFCs have provisions to sanction the entire capital for an unsecured business line of credits

Stringent Paperwork

Another notable benefit of availing a line of credit from NBFCs is that they have less paperwork and documentation. While, on the other hand, banks have stringent processing requirements. Moreover, the inability to produce requisite documents required by banks may lead to rejection of your loan application. 

Fewer Rules and Regulations

Compared to banks, NBFCs have less stringent rules and regulations for processing the line of credit business loans. They assure to provide borrowers an instant credit decision that varies from days to even hours. Thus, in instances of immediate capital requirements, it is always better to apply for a line of credit from an NBFC. Apart from quick processing, NBFCs provide transparency and great customer service in their offerings. Their data-based innovative processes enable them to accord a significant upgrade to existing services from banks. 

WHAT TO CHOOSE- BANK OR NBFC?

Hence, from the aforementioned information, it can be inferred that availing an unsecured business line of credit from an NBFC can offer you a better deal than banks. However, before opting for a loan from any institute, a borrower must thoroughly consider all constraints of the line of credit financing. These may include EMI, loan amount, interest rate, processing charges, disbursal timeline, and terms & conditions. Based on all factors considered precisely a choice between both financial institutions should be made. 

However, if you are in a search of most hassle-free unsecured working capital business loans, then FlexiLoans should be your go-to provider. Specializing in providing innovative short-term loan solutions, FlexiLoans serves to be the perfect conduit for delivering credits to SMEs and MSMEs.  

So, hurry up!! Apply for quick and easy business loans through FlexiLoans today.