NBFC loans vs bank loans

Historically, banks are the primary source of loan, but in recent years, Non-Banking Financial Corporations (NBFCs) have emerged as alternatives. Both banks and NBFCs are regulated by RBI but banks are subject to more stringent rules than NBFCs Due to bank’s stringent lending terms, most individuals and businesses fail to meet traditional bank’s loan eligibility criteria. Banks and NBFC have their own set of pros and cons, and what might be better for one person may not be the same for another. Whether NBFC loans are better than bank loans or vice versa depends on one’s financial needs. Here are some factors that one can consider when comparing NBFC loans to bank loans: 

Qualifying rules

CIBIL Score: Banks have stringent credit score requirements and are inflexible while providing loan facilities to applicants with low credit score. It becomes challenging to secure a loan from a bank with low credit score. However, applicants with low credit score have a chance to get approval from NBFCs. NBFCs don’t solely rely on credit score, they have important factors set to determine a borrower’s creditworthiness.  

Higher Risk Appetite: NBFCs have higher risk appetite and typically a digital journey that provides more detailed reports on frauds. Additionally, these firms don’t take retail consumers money directly and are hence less stringently regulated by RBI. This means they are more willing to take riskier loans and borrowers who may not meet strict credit standards of banks. This can consist of individuals or businesses with less-established credit histories. 

New to Credit: NBFCs might be more open to lending to individuals who are new to the credit market and do not have a substantial credit history. Banks often prefer borrowers with a well-established credit history. They have a system for evaluating credit that assesses a borrower’s creditworthiness. The NBFCs evaluate the borrower’s creditworthiness based on factors such as borrower’s turnover, bank statements, ITR and cashflows, etc.

Quick disbursement
NBFCs are known for their faster loan processes. Banks generally involve extensive paperwork and documentation, which might include preparing financial and legal documents, as well as detailed information about the business and its operations. NBFCs offer simpler loan approval process, with minimal eligibility criteria and documentation requirements. Many NBFCs specialize in specific niches or sectors, such as microfinance, consumer finance, or small business loans. Their specialization allows them to develop expertise in those areas, leading to faster evaluations and approvals.
Pre-approved loan limit
Many NBFCs offer business loans with pre-approved limits. This enables business owners to withdraw funds as needed, with interest charged only on the amount utilized and no to the whole amount that is accessible to them. As a result, borrowers can save more by keeping EMIs low and freeing up capital for other business needs. Thus, pre-approved loan limits ensure small businesses have access to funds when unexpected expenses arise.
Customized loan structure
NBFCs have various products and structures defined for specific use cases. Their digital journey enables them to offer customized solutions. Small businesses generally benefit with these small business loans that NBFCs provide with moratorium, repayment flexibility, tenor flexibility as well as restructuring as and when required providing that additional cushion to uncertain cashflows associated with small businesses.

Conclusion

In conclusion, whether NBFC loans are better, or bank loans depends on the borrower’s needs. Borrowers should evaluate their financial obligations, credit affordability and future plans to decide which institution is suitable for them. One can compare business loan from NBFCs and banks to make an informed decision based on financial situation and needs. The small business owners should thoroughly evaluate lender over not only, quantitative parameters such as business loan interest rate, processing fees, early or prepayment charges, but also on qualitative factors such as processing time, ease of application, customer support and transparency amongst others and create a pros and cons metric before making any decision.

About Red Fort Capital

Red Fort Capital is dedicated to empowering Indian MSMEs (Micro, Small, and Medium Enterprises) on their path to business growth through customized business loans. We understand that securing a business loan in India can pose significant challenges, particularly when factors like a less-than-ideal credit score, a relatively short business history, unclear financial records, or variable cash flow come into play.
As a respected Non-Banking Financial Company (NBFC), we take pride in offering a diverse range of secured business loans, spanning from 1 to 10 Crores. What sets us apart is our remarkable ability to disburse funds fast, in just 7 days. Our financial solutions are meticulously designed to cater to a spectrum of needs, including working capital requirements, equipment and machinery purchases, invoice/bill discounting, and last-mile financing, among others.

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