Why A Startup Must Choose A NBFC Over Bank For A New Business Loan

 

Are you worried about funds to start your startup? Or are you worried about funds to run and expand your startup? In either case, this blog will help you to solve your crucial problem, which is the source to get loans for small business/startups. 

What is a startup

A startup is a young company started by one or more entrepreneurs with a unique product or service which they want to develop and bring to the market. Initially, it is funded by the founder’s own money. The startup process can take a long period.  Initially, startup faces a high level of uncertainty and challenges. Many face failure but few startups become successful ventures.  Some become Unicorns that are privately held startup companies valued at US$ 1 billion.

Challenges

When starting a business a new entrepreneur faces many challenges like

• High competition in the market.

• Hiring skilled candidates within a limited budget.

• To acquire customers.

• Dealing with unknown.

• Unrealistic expectations.

• Leadership problem.

• Forming partnership.

But the biggest challenge is to arrange finance. The need for finance/capital is the main hurdle on the way to success for a startup. A new business faces many ups and downs in a business cycle and to overcome those you need funds.

Fund source

There are many ways a startup can raise funds.

• Approaching angel investors and venture capitalists.

• Crowdfunding

• Applying loans to Banks 

• Applying for a loan to NBFCs.

Angel investors invest money in your business in exchange for a return on investment and also equity.  Crowdfunding is stress full as you have to fulfill the expectations of a lot of people who invested in your startup.  For a new business, the best method to raise funds is either to avail loans from banks or NBFCs.

Now the most crucial question arises whether to choose a bank or NBFCs for your loan. If you compare both the institutions NBFC is the best source to get a business loan for a startup. Now let’s discuss further and compare both on different parameters to find out.

Bank Versus NBFC for a business loan

To withstand the unpredictable business cycle and to scale up a startup needs funds all the time. To fulfill the fund requirement startups depend on loans. Nowadays there are plenty of avenues for finances are available for a startup. The Government has also come up with different schemes to support these startups. From the available resources best option is to go for either bank or NBFCs.

NBFC is a non-banking financial company that can provide banking services without holding a banking license or any legal agreement. NBFCs are registered under the company’s act 1956 to offer services similar to banks. NBFCs are privately owned institutions and are regulated by RBI and other government entities.

A bank on the other hand is a financial institution that accepts deposits and creates credit. Banks can lend either directly or indirectly through the capital market.  Banks can manage financial products and services authorized to them. Banks can accept demand deposits but NBFCs cannot accept demand deposits. NBFCs can only lend and invest. NBFCs are not as strictly regulated as banks which gives them an edge over banks. Now let’s compare various parameters to decide which source is better for a startup.

Loan Eligibility:

NBFCs can sanction amounts higher than banks because they are not as strictly regulated as a bank.  Most banks don’t fund the entire credit amount whereas NBFCs can do so. NBFCs offer business loans with a loan limit that is pre-approved which means you can withdraw funds from your pre-approved loan limit and will be paying interest only on the used amount and not on the entire loan amount. This can help in reducing the monthly EMIs and overall cost.

Interest Rate

Banks provide loans based on MCLR which means the minimum interest rate below which they cannot lend. On the other hand, NBFCs provide loans based on the prime lending rate (PLR) which is not regulated by RBI. NBFCs have the freedom to increase or decrease the interest rate as per their requirement. It ultimately benefits the customers.

Paperwork:

Banks are stricter when it comes to paperwork. If you are not able to produce all papers banks can refuse to lend. That’s why most business prefers NBFCs because of less documentation and paperwork. Normally NBFCs ask for lesser documents which makes the process easy and hassle-free.

Loan processing time:   

Banks are rather strict and rigid while processing a loan. They inspect every document carefully and take a long time to process a loan. Whereas, NBFCs adopt a more relaxed approach while processing the loan. They try to process a loan as fast as they can with minimum documents. Nowadays processing of many documents happening online also which is making it easier to avail of a loan. Many new businesses have immediate fund requirements and that’s why a longer waiting period can be a hurdle in the business process. For this reason, NBFC is the best place for them to get a loan.

Credit Score:

 Banks are strict when it comes to credit scores as they want to cover the risk. They normally refuse lending if the credit score is not good. But that is not the case with NBFC. NBFC offers loan even if your credit score is not good. In this case, they can charge a higher interest rate to cover the default risk. For a new business, it’s important to get a loan to meet their requirement and a credit score should not be an obstacle.

Conclusion

NBFCs have evolved tremendously in recent years. The growth of this sector has contributed significantly to the Indian financial sector. The growth of the MSME sector has accelerated due to NBFC s. They are offering innovative financial products to small businesses. NBFC offers loans to a neglected and unorganized section of society. It has the highest share of non-secured loans.

Both the institutions offer a business loan. But NBFCs are more flexible in terms of interest rate, paperwork, loan eligibility, paperwork, and credit score compared to banks. For a startup, it’s important to get a new business loan with a competitive interest rate and less paperwork. From the above discussion, it is clear that for startups NBFC is the best bet.