Entrepreneurs have several options when considering a small business loan. While traditional banks are one possibility, many small business owners also turn to government schemes, micro-financing firms, and Non-Banking Financial Companies (NBFCs) for their funding needs. Each of these options offers unique advantages and may be more suitable depending on the business's specific circumstances.
Among these choices, banks and NBFCs stand out as two major players in the small business lending space. In this blog, we'll focus on comparing these two options. Understanding their differences will help you choose the best financial institution for quick small business loans.
Benefits of Getting a Loan from a Bank
Banks are traditional financial institutions that provide various financial services, including some of the best small business loans, savings accounts, and investment options. They are regulated by the Reserve Bank of India (RBI), which ensures they follow strict rules and guidelines. The primary benefits of getting a bank loan for small business include the following:
Lower Interest Rates
One of the most significant advantages of getting a loan from a bank is the lower interest rates. Banks generally offer lower rates because they have a larger pool of funds and a more stable financial structure. This can help you save money over the life of the small business loan.
Established Reputation
Banks have a long history and a strong reputation in the financial world. This can be reassuring when you are taking out a significant loan. Banks are known for their reliability and trustworthiness.
Variety of Loan Products
Banks offer a wide range of loan products, including term loans, working capital loans, and overdraft facilities. This variety allows you to choose a loan that best suits your specific needs. You can also get additional financial services from the same institution, such as business accounts and credit cards.
Benefits of Getting a Loan from an NBFC
NBFCs, on the other hand, are financial companies that offer similar services to banks but are not banks themselves. The RBI also regulates them, but they have more flexibility in their operations. NBFCs often focus on providing quick small business loans and financial products to individuals and businesses. The following are some of the prominent benefits of availing a loan from an NBFC:
Flexible Terms
NBFCs are known for their flexibility. They often have more relaxed eligibility criteria and can offer customised small business loan products. This means they might be willing to work with you even if you don’t meet all the traditional banking requirements.
Faster Processing
If you need funds quickly, NBFCs might be a better choice. They often have a faster loan processing time. This can be crucial for small businesses that need immediate cash flow to seize opportunities or cover unexpected expenses.
Focus on Specific Needs
NBFCs often focus on specific sectors or types of quick small business loans. For example, some NBFCs specialise in equipment financing or working capital loans. If your business needs are very specific, an NBFC that specialises in that area might be able to offer you better terms and more relevant services.
Main Factors That Differentiate Between Banks and NBFCs
Take a look at the following table to understand the basic differences between bank vs NBFC small business loans.
| Parameter | Banks | NBFCs |
| Interest Rates | Bank interest rates are generally lower due to the regulated environment | Interest rates are often higher due to higher risk and flexibility |
| Processing Time | It can be slower due to rigorous paperwork and approval processes | Typically, faster with less stringent paperwork |
| Eligibility Criteria | More stringent, requiring good credit scores and extensive documentation | More flexible, with less strict criteria and quicker approvals |
| Loan Products | Wide range, including personal, business, and home loans | Specialised products with tailored solutions for specific needs |
| Customer Service | Often more standardised and formal | Usually more personalised and customer-focused |
Key Considerations for Choosing Between Banks and NBFCs
Interest Rates
Compare the interest rates offered by banks and NBFC small business loan. Lower rates can save you a lot of money over time. Ensure that you understand the total cost of the loan, including any hidden fees.
Loan Terms and Conditions
Examine the loan's terms and conditions, including repayment schedules, prepayment options, and any penalties for early repayment. Ensure the terms align with your business’s cash flow and financial planning.
Eligibility Criteria
Review the eligibility criteria for both banks and NBFCs. Banks might have stricter requirements, such as a higher credit score or a longer business history. An NBFC small business loan might be more flexible, which can be beneficial if you’re a newer business or have a lower credit score.
Customer Service
Consider the level of customer service provided by the financial institution. Good customer service can make the loan process smoother and provide support if you encounter any issues. Check reviews and ratings for both banks and NBFCs.
Additional Services
Look at the additional services offered by the financial institution. Banks might offer a wider range of financial products and services, such as business accounts, credit cards, and investment options. NBFCs might provide specialised services related to their small business loan products.
Conclusion
Choosing between a bank and an NBFC for your small business loan depends on your specific needs and circumstances. Banks offer lower interest rates, established reputations, and a variety of quick small business loans. NBFCs provide flexible terms, faster processing, and specialised services. Evaluate your options carefully, considering interest rates, loan terms, processing time, and eligibility criteria.
By understanding the differences and choosing the right financial institution, you can secure the funding your business needs to grow and succeed. Whether you opt for a bank or an NBFC, ensure you manage your loan responsibly to achieve your business goals.
FAQs
1. Can NBFC accept demand deposits?
NBFCs cannot accept demand deposits. Unlike banks, they do not offer savings or checking accounts where you can deposit and withdraw money on demand. Their primary function is to provide loans and financial services, and they usually focus on specific financial products rather than traditional banking services.
2. Is it better to take a loan from a bank or NBFC?
It depends on your needs. Banks typically offer lower interest rates and a wide range of services, while NBFCs provide flexible terms and faster processing. Taking a loan from a reputed NBFC like Shriram Finance can be beneficial for its flexibility, speed, and tailored solutions. However, compare interest rates and terms with banks to ensure they meet your needs.
3. What are the main differences between banks and NBFCs in terms of loan approval processes?
Banks typically have more stringent approval processes, requiring extensive documentation and often taking longer. NBFCs usually have more flexible and faster approval processes with less rigid documentation requirements.
4. Are there any specific industries or business types that NBFCs are more likely to lend to than banks?
NBFCs often cater to niche markets or industries that banks might consider too risky, such as startups, small retailers, or businesses in emerging sectors. They may also be more willing to lend to businesses with less established credit histories.
5. What types of collateral do banks and NBFCs usually accept for small business loans?
Both banks and NBFCs accept various forms of collateral, including property, equipment, inventory, and accounts receivable. NBFCs might be more flexible in what they accept as collateral and may offer more unsecured loan options.
