When choosing between an unsecured business loan from a bank or a Non-Banking Financial Company (NBFC) in India, there are several differences to consider based on factors such as interest rates, loan processing time, eligibility criteria, and flexibility. Both banks and NBFCs offer distinct advantages and disadvantages, depending on your business’s financial needs and profile.
1. Eligibility Criteria
- Banks:
- Banks generally have stricter eligibility criteria for unsecured business loans. They usually require a high credit score (usually 700+), a strong financial history, and well-established business operations.
- They may demand extensive documentation, such as profit and loss statements, audited financials, bank statements, and business plans.
- NBFCs:
- NBFCs are typically more flexible with their eligibility requirements. They often provide loans to businesses with lower credit scores (as low as 600), newer businesses, or those without a lengthy financial history.
- The documentation process is usually simpler and faster compared to banks.
2. Loan Amount
- Banks:
- Banks generally offer higher loan amounts, especially to established businesses with a proven track record. The loan amount could range from ₹10 lakh to ₹5 crore or more, depending on the borrower’s financial profile and business stability.
- NBFCs:
- NBFCs may offer slightly lower loan amounts compared to banks, particularly for businesses that are just starting out or those with a weaker credit profile. However, many NBFCs also offer competitive loan amounts, typically ranging from ₹5 lakh to ₹3 crore.
3. Interest Rates
- Banks:
- Banks generally offer lower interest rates on unsecured business loans compared to NBFCs, since they have access to cheaper funds and follow more stringent risk assessment processes. Interest rates from banks can range between 10-16% per annum, depending on the borrower’s credit score and relationship with the bank.
- NBFCs:
- NBFCs usually charge higher interest rates, typically ranging from 12-24% per annum. The higher interest compensates for the higher risk they take in lending to businesses with lower credit scores or limited financial history. NBFC interest rates can vary widely based on the borrower’s risk profile.
4. Loan Processing Time
- Banks:
- Banks usually take longer to process unsecured business loans due to their strict credit checks, documentation requirements, and internal approval processes. Loan approval can take anywhere from 7 to 15 working days or even longer.
- NBFCs:
- NBFCs are known for their faster loan approval and disbursement process, with minimal documentation. They often disburse loans within 2 to 5 days. This makes NBFCs a preferred option for businesses that need quick funding for urgent needs.
5. Documentation
- Banks:
- Banks usually require extensive documentation for unsecured business loans, including audited financials for the last 3 years, bank statements, tax filings, and detailed business plans.
- NBFCs:
- NBFCs have simplified documentation processes, often requiring basic financial documents like bank statements, profit and loss accounts, and KYC documents. This reduces the time and effort involved in applying for a loan.
6. Flexibility
- Banks:
- Banks often have rigid loan structures with little flexibility in terms of loan tenure, repayment schedules, or loan conditions. This can be limiting for businesses with fluctuating cash flows or those seeking customized solutions.
- NBFCs:
- NBFCs tend to offer more flexible loan structures, with customized repayment schedules, loan tenures, and even flexible EMIs based on cash flow patterns. This makes them an attractive option for businesses with dynamic cash flow needs.
7. Credit Score Requirements
- Banks:
- Banks typically require higher credit scores, often above 700, to approve unsecured business loans. They place significant importance on the borrower’s credit history and financial strength.
- NBFCs:
- NBFCs are more likely to approve loans for businesses with lower credit scores (600-700), making it easier for small businesses, startups, or businesses with weaker credit profiles to access funds.
8. Loan Tenure
- Banks:
- Banks usually offer longer loan tenures, ranging from 1 to 5 years, which can provide businesses with more time to repay the loan in smaller EMIs.
- NBFCs:
- NBFCs generally provide shorter loan tenures, typically between 1 to 3 years. However, some NBFCs also offer longer repayment terms depending on the borrower’s financial profile.
9. Customer Service and Support
- Banks:
- Banks often provide more structured customer support, particularly to long-standing customers or businesses that maintain accounts with the bank. However, banks may not offer personalized services for smaller or newer businesses.
- NBFCs:
- NBFCs usually offer more personalized services and quicker responses, especially since they cater to a wider range of business profiles, including small businesses and startups.
10. Prepayment and Foreclosure Charges
- Banks:
- Banks may charge prepayment penalties if the borrower wants to repay the loan before the completion of the tenure. Some banks, however, allow prepayment without charges after a certain period (e.g., after 12 months).
- NBFCs:
- NBFCs often have higher prepayment and foreclosure charges compared to banks. However, they also tend to offer more flexibility in loan structuring, which can offset the need for early prepayment.
11. Risk Appetite
- Banks:
- Banks are more conservative in their risk appetite. They tend to lend to well-established businesses with strong financials and long operational histories.
- NBFCs:
- NBFCs generally have a higher risk appetite and are more willing to lend to newer businesses, businesses with lower credit scores, or those with less documentation, which makes them a popular option for small businesses and startups.
Summary: Banks vs NBFCs for Unsecured Business Loans
| Criteria | Banks | NBFCs |
| Eligibility Criteria | Stricter, high credit scores | Flexible, low credit scores accepted |
| Loan Amount | Higher amounts available | Slightly lower amounts, flexible |
| Interest Rates | Lower (10-16%) | Higher (12-24%) |
| Processing Time | Slower (7-15 days) | Faster (2-5 days) |
| Documentation | Extensive | Simplified |
| Flexibility | Rigid loan structures | Flexible, customized loans |
| Credit Score Requirements | Higher (700+) | Lower (600-700) |
| Loan Tenure | Longer (1-5 years) | Shorter (1-3 years) |
| Customer Service | Structured but less personalized | Personalized and quicker responses |
| Prepayment Charges | Often lower or none after a period | Higher prepayment fees |
| Risk Appetite | Conservative | Higher risk appetite |
Conclusion:
- Banks: Better for businesses with a strong credit history, well-established operations, and the ability to meet stringent eligibility criteria. Banks offer lower interest rates and higher loan amounts but come with slower processing and stricter requirements.
- NBFCs: Ideal for small businesses, startups, or businesses with lower credit scores that need quick access to funds and more flexible repayment options. While NBFCs charge higher interest rates, they provide faster approvals and more flexibility in terms of loan structure.
Choosing between a bank and an NBFC for an unsecured business loan depends on your business’s financial health, loan urgency, and the flexibility you require in repayment terms.