SME Finance – Should You Choose a Bank or NBFC?

Be it a personal loan, home loan or SME finance, prospective borrowers often face a dilemma – whether to opt for a bank or an NBFC to borrow the finance.

If you have an SME business for which you wanted to avail a high amount of loan and confused whether to pick a bank or NBFC, you are not alone. Nonetheless, you need not worry as this post will help you know which one to pick while applying for an SME loan.

Banks vs. NBFCs – Major differences

Before you get to know whom to apply for, have a look at some of the key differences between the banks and NBFCs.

NBFC stands for non-banking finance companies (NBFCs) and is not banks.

But they do many similar activities as the bank such as lending, offering loans, savings and investment products, managing stock portfolios and beyond.

Although banks and NBFCs are involved in similar activities, there is a huge difference when it comes to their conduct of business and regulations. Banks are under the helm of the Reserve Bank of India while NBFCs are run by the clauses of The Companies Act, 1956.

The only difference is that NBFCs can’t accept deposits and issue drafts or cheques and, banks on the other hand, can do that.

Whom should you approach for an SME loan?

NBFCs have emerged as one of the major fund sources while applying for the SME loan in India. Easy documentation, hassle-free eligibility, higher loan amount and much more are the reasons for scoring it over banks.

5 areas where NBFCs can score over banks

Competitive rate of interest

Compared to banks who lend at MCLR, NBFCs do that at Prime Lending Rate (PLR) and is not regulated by RBI. It makes NBFC be in a great position to vary the SME loan and offer it at an attractive rate to borrowers. Like this, if you apply for an SME finance with an NBFC, you can negotiate for a lower rate and save huge.

Loan eligibility

Compared to leading nationalized and private banks, non-banking finance companies (NBFCs) have relaxed and non-complex eligibility terms when awarding a loan. NBFCs are aware that people avail loans only during an emergency or urgent situation concerning many needs, and hence, provide loans at easy eligibility.

Tenor

NBFCs have maximized SME loan or other finance tenor and that helps borrowers to spread the cost of the loan in longer months and pay smaller EMIs.

Easier paperwork

Banks are very strict when it comes to meeting documentation and paperwork and hence, the probability of a loan rejection is more. NBFCs on the other hand, are more liberal towards the paperwork. Even if the borrower fails to provide some documents, the NBFCs request them and don’t reject the application unless it’s necessary.

The Credit Score

Banks, while offering SME loan to business owners are strict when it comes to checking their CIBIL Score and may not approve in case of a lower score. NBFCS, on the other hand, may not reject an SME loan or another loan if someone has a lower CIBIL Score but may charge a higher rate of interest to cover up.

The Bottom Line

Taking about the SME loan, NBFCs can let you borrow up to Rs.30 lakh at the lower rate of interest if you are willing to apply for the SME finance for your business.

Once you are set to apply, assess your needs and affordability so that you can manage the loan without issues.

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