Recently, NBFCs have taken a lead in providing business loans. Despite economic up-downs, they have remained the preferred choices for retail lending. And still, due to less stringent terms and procedures these non-bank financial institutions continue to hold a major share in business loan financing.
NBFCs don’t accept demand deposits but they can simply lend or make an investment. However, when it comes to taking out a business loan, maximum opt for NBFCs over banks and the reason behind this is banks have tough policies and take more time for sanctioning or approving a quick business loan. Contrarily, NBFCs make sure the processing is faster and the required amount of business loan is disbursed within a few days. Albeit interest rates are high at NBFCs maximum times in comparison with banks, borrowers still like to take out NBFC loan pondering the easy way of borrowing loan and less difficulty.
NBFCs vs. Bank
Banks and NBFCs both have different rules and regulations. Banks are regulated under the RBI, while the NBFCs are regulated as per the Companies Act, 1956. NBFCs are generally categorised into three types, namely loan companies, asset companies, and investment companies.
When MSMEs decides to avail a business loan, they usually find themselves in the dilemma to choose between a bank and an NBFC. However, based on the recent trends show that MSMEs are more inclined towards NBFCs because of their features that include more flexibility, more personalised services, and fast loan disbursement process.
Reasons to apply for a loan from NBFCs instead of Banks
1. NBFC prioritize customers
Both banks and NBFCs are service-led industries, but when it comes to providing customer-centric services, NBFCs easily outrun banks. Most often than not, borrowers are worried about interest rates and hidden charges; and they often neglect the fact that interest rates can fluctuate as they are subject to market risks. NBFCs, including HFCs (Housing Finance Companies), are systematically evolving to provide handheld customer service. The borrowers can stay up to date about loan details, payment, and extra charges for using their accounts online.
2. Fewer Rules and Regulations for Lending
Since NBFCs are under the Companies Act, lending rules and regulations are not as rigid as banks. This helps borrowers receive loans with ease. The borrowers are extremely satisfied due to the less complex loan processing.
3. Competitive Interest Rates
Interest rate is one of the primary concerns for loan seekers. And this is where the NBFCs have excelled. As compared to traditional banks, NBFCs offer competitive rates of interest on business loans. Their base interest rate is stipulated based on the prime lending rate (PLR) which is not regulated by RBI. Therefore, these Non-financial institutions enjoy greater flexibility and can vary their rates of interest in SME loans.
4. Fast Processing
Applicants need to meet the eligibility criteria set by banks, but NBFCs are compliant in this aspect. This makes the loan approval process simpler, faster, and more seamless. Maximum times, people apply for a business loan where they instantly require money. Financial institutes have considered this as a scope to fulfill the demand by fast processing the NBFC loans at a competitive interest rate. In fact, borrowers are prepared for compromising on rates of interest in case the loan amount is high and they could get the approval fast.
5. Lenient Eligibility Criteria
Contrary to banks, NBFCs follow a relaxed approach to loan eligibility. They accord the customers easier and faster financing. Despite having 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.
6. Holistic Credit Evaluation Process
As compared to banks, NBFCs do not just rely on the credit or CIBIL score of a business owner. They have their own credit evaluation system in place, which evaluates the creditability of the borrower on a holistic approach. The NBFCs consider the business industry, years into the same business, bank statements, turnover, and ITR filed in the 2-3 previous years to assess the creditworthiness of the borrower.
7. Minimum supporting Documents and Paperwork
NBFCs possess an incredible share of non-security small business loans. They are able to garner the attention of loan seekers due to minimal documentation and paperwork. On the other hand, Banks follow more stringent rules and regulation when it comes to paperwork. In case if a borrower fails to furnish the required documents banks may refuse to process the loan application.
Is it safe to take loan from NBFC?
Contradicting bank loans that are linked to external benchmarks, loans from NBFCs are linked to the prime lending rate. Also NBFCs have more straightforward and relaxed policies to offer the customers with low credit scores, although they come with high interest rates.
Where to get a Business Loan?
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