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Bank or NBFC: Which is Better for Business Loan?

3 Mins 25 Feb 2022 0 COMMENT


As a business owner, you may require financing from time to time to withstand unpredictable business cycles and manage operational costs. Thanks to the business loans offered by several banks and Non-Banking Financial Corporations (NBFCs) in India, getting access to working capital is no more a difficult thing these days.

Business loans are usually collateral-free loans, which means that you are not required to pledge any asset as security to qualify for these loans. All that you have to do is apply for a business loan online on the lender’s website, upload the required documents, and you’re set.

However, a common dilemma that many borrowers face while applying for a business loan is choosing between a bank or an NBFC. Let’s evaluate the differences between these two types of financial institutions in India based on some important parameters.

Business Loan: Bank or NBFC

Eligibility Criteria

The eligibility criterion for business loans is one of the most important parameters you should look at while choosing your lender. After all, your loan application would be approved only if you fulfil the eligibility criteria of the lender.

As compared to banks, NBFCs offer business loans with somewhat relaxed eligibility criteria. This is because they are not regulated as tightly as banks.

Though it varies from lender to lender, most NBFCs ask for a few basic requirements for providing business loans, such as Indian citizenship, minimum annual turnover, business stability, and a satisfactory credit score.

Interest rates 

The interest rate levied on your business loan is another important factor that you need to consider. NBFCs usually offer loans at competitive interest rates as compared to banks.

It’s because banks are not permitted to lend below the Marginal Cost of Funds based Lending Rate (MCLR) determined by the Reserve Bank of India (RBI).

On the other hand, NBFCs offer loans based on the Prime Lending Rate (PLR), which is not regulated by the RBI. Hence, they have a competitive edge over banks that cannot lend below the MCLR slab.

Documentation and paperwork

NBFCs possess a lion’s share of unsecured small business loans. Maximum micro and small-sized businesses depend on NBFCs for their financing needs since they offer business loans with minimal paperwork and easy documentation.

On the other hand, banks follow stringent regulations when it comes to paperwork. If a borrower fails to furnish the required documents, they may even reject his/her loan application.

Additional Read: Need a Loan? Here's all You Will Require for a Quick and Easy Loan Application Process 

Credit evaluation

When you apply for a business loan, your lender conducts a credit evaluation process to determine whether it should approve your loan application or not. As compared to banks, NBFCs follow a more holistic approach for the credit evaluation of borrowers.

They do not just rely on the credit score of a business owner. Instead, they also look at various other factors, such as the business’ stability, industry outlook, and annual turnover to determine their creditworthiness.

On the other hand, banks follow strict guidelines for the credit evaluation of the borrower. They approve loan applications only if a borrower has a good credit score (750 and above).

Processing time

Another factor that is crucial to choosing your lender is the loan processing time. After all, who would not want quick access to finances in the hour of need.

As NBFCs demand simple eligibility criteria and minimal documentation, their loan approval process of quick, efficient, and more seamless. In contrast, banks follow a lengthy verification process and hence, take more time to process business loan applications.

Additional Read: Different Types Of Business Loans

The final word

All the above-mentioned details indicate that NBFCs have a slight edge over banks when it comes to business loans. However, that doesn’t mean you should ignore banks as they are the more traditional and reliable source of financing. You need to carefully weigh the pros and cons of both to decide what would work best for you.

Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. Please note, loans related services are not Exchange traded products and I-Sec is acting as a distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing.

ICICI Securities Ltd. acts as a referral agent to ICICI Bank Ltd. for loan related services & the loan facility is subjective to fulfilment of eligibility criteria, terms and conditions etc.

The contents herein mentioned are solely for informational and educational purpose.