Funds assist businesspersons to complete their goals for their company’s operations. For the smooth functioning of a business, it is imperative to secure adequate economical support, and one can obtain it either from banks or Non-Banking-Financial-Companies (NBFCs). The banks in India are included under the Banking Regulation Act, 1949 and the NBFCs are incorporated by the Companies Act, 1956.
How is an NBFC Different From a Bank?
NBFCs are very similar to banks, but these do not perform certain financial activities in which banks are engaged. A few relevant examples are: issuing cheques, accepting demand drafts etc. However, NBFCs do provide advances, credit facilities, loans, management portfolio of stocks etc.
Banks have always retained an important position in financial services, but today NBFCs are giving tough competition to those, especially in offering business loans to individuals and firms. Many are opting to borrow from NBFCs given a great number of advantages these institutions cater to.
Why Do People Opt for Business Loans from NBFCs?
1. Bad Credit History: Those with poor credit history often face a rejection for their loan application from a bank. This is because banks look at the low-credit scores as a high risk for lending purposes. There is a possibility that individuals with bad credit scores may default on EMI payments.
But, NFBCs offer business loans to people with a low credit score as well. In such cases, interest rates would be quite higher than the ones provided by the bank, because the institution wishes to offset the risk of default.
2. Less Stringent Eligibility Criteria: Compared to banks, the NBFCs are unknown to have less stringent rules and requirements for loan eligibility. Banks always have very strict obligations, which the applicant must stand up to in order to get funds. In case the applicant does not match up to the bank’s eligibility criteria, the loan application gets rejected.
At NBFCs, there is usually only minimal documentation involved, and on successful submission of documents, the business loan is processed quickly with the amount being disbursed to the applicant’s bank account. NBFCs could be a choice for those who do not meet up to bank’s eligibility criteria.
3. Competitive Loan Programs: In order to compete with the banks, NBFCs often resort to adding certain benefits to the business loan programs. This is a means to attract more customers. Some institutions may have a lower cut of processing fees and no or minimum part-payment or prepayment penalty charges. Others may present greater flexibility in EMI payments or have special loan plans for women, senior citizens etc.
Because of the above-mentioned benefits served by the NBFCs, many choose these to back their business. As a loan could be an essential requirement for a businessperson, it is important to understand other options than just banks to get the funds when indispensable. NBFCs are frolicking all over the country and complement the banks in offering myriad loan services.
What to Choose- Bank or NBFC?
Depending upon a person’s financial requirements, he/she can either choose a bank or NBFC for taking a business loan. In case he/she meets all criteria with banks for a loan application and still finds it comfortable to get the funding from NBFC, then it is their personal choice.
Before opting for a loan from any institute, one must make sure he/she is receiving the best in the bargain (in terms of loan tenure, EMI scheme, interest rate, other benefits, terms and conditions etc.)- be it either a bank or NBFC.