Company Logo

Banks or NBFCs: Which is Better for Small Business Loans?

Summary Of Banks or NBFCs

When it comes to securing a loan for your small business, choosing between banks and Non-Banking Financial Companies (NBFCs) depends on your specific needs and circumstances. Banks generally offer lower interest rates, larger loan amounts, and longer repayment terms but have strict eligibility criteria and longer processing times. They are ideal for businesses with strong credit histories and long-term capital requirements.

Small businesses are the backbone of any economy, driving innovation, employment, and growth. However, one of the biggest challenges for small businesses is accessing timely and adequate funding to sustain operations or scale their ventures. When it comes to financing, two key players dominate the landscape: Banks and Non-Banking Financial Companies (NBFCs).

But which is better for small business loans? The answer depends on various factors like loan eligibility, processing speed, interest rates, and flexibility. In this blog, we’ll provide an in-depth comparison of banks and NBFCs to help small business owners make an informed decision about securing loans.

Understanding Banks and NBFCs

Before diving into the comparison, let’s briefly understand what banks and NBFCs are:

What Are Banks?

Banks are financial institutions that are licensed by the Reserve Bank of India (RBI) to accept deposits, provide loans, and offer various financial services. They follow strict regulations and provide loans with relatively lower interest rates.

What Are NBFCs?

Non-Banking Financial Companies (NBFCs) are financial institutions that provide loans and other financial services but do not have a banking license to accept deposits. NBFCs are regulated under the Companies Act and are known for their flexibility and faster loan approvals.

Explore More: If you're looking for additional funding options, check out our Government Grants Services.

Comparison: Banks vs NBFCs for Small Business Loans

AspectBanksNBFCs
Processing TimeSlower (7–15 days).Faster (1–3 days).
Interest RatesLower (7%–12%).Higher (12%–26%).
EligibilityStrict (high credit score needed).Flexible (low credit score accepted).
DocumentationExtensive paperwork required.Minimal paperwork needed.
FlexibilityRigid loan terms.Highly customizable.

Let’s compare banks and NBFCs based on key factors relevant to small business loans:

1️. Eligibility Criteria

Banks:

  • Banks have stringent eligibility criteria, requiring good credit scores (usually above 750), a proven business track record, and substantial documentation.
  • They are ideal for established businesses with a strong credit history.

NBFCs:

  • NBFCs have relaxed eligibility norms, making them accessible to small businesses, startups, and entrepreneurs with lower credit scores or limited business history.
  • They often evaluate loans based on cash flow rather than just credit scores.

Verdict: NBFCs are better for small businesses with limited credit history or poor credit scores.

2️. Loan Processing Time

Banks:

  • Banks typically have a longer processing time due to their rigorous evaluation processes and high regulatory requirements. Loan approval can take 7-15 business days or more.

NBFCs:

  • NBFCs are known for fast loan approvals, often disbursing funds within 2-3 business days. They leverage technology for quick evaluation and decision-making.

Verdict: NBFCs are ideal for businesses requiring urgent loans.

3️. Interest Rates

Banks:

  • Banks offer loans at lower interest rates, typically ranging from 7% to 12% for small businesses. However, the rates depend on the borrower’s creditworthiness and financial stability.

NBFCs:

  • NBFCs usually have higher interest rates, ranging from 12% to 24%, due to their flexible criteria and higher risk appetite.

Verdict: Banks are better for businesses looking for lower interest rates.

4️. Loan Amount and Tenure

Banks:

  • Banks often provide higher loan amounts and longer repayment tenures (up to 10 years or more).
  • They are suitable for long-term projects and significant capital requirements.

NBFCs:

  • NBFCs cater to small-ticket loans with shorter repayment tenures, typically up to 5 years.
  • They are better for short-term or medium-term financing needs.

Verdict: Banks are better for long-term, high-value loans, while NBFCs are ideal for small-ticket loans.

5️. Documentation Requirements

Banks: Banks require extensive documentation, including business registration certificates, audited financials, tax returns, and a detailed business plan.

NBFCs: NBFCs have minimal documentation requirements, making the loan application process simpler and less time-consuming.

Verdict: NBFCs offer a hassle-free loan application process.

6️. Flexibility in Loan Terms

Banks: Banks have rigid loan terms, leaving little room for negotiation. Loan products are typically standardized.

NBFCs: NBFCs are highly flexible, offering customized loan products tailored to the borrower’s needs.

Verdict: NBFCs provide more flexibility.

7️. Regulatory Oversight and Security

Banks: Banks are highly regulated by the RBI, ensuring greater transparency and borrower protection.

NBFCs: NBFCs are less regulated than banks, which can lead to higher risks in terms of transparency and loan terms.

Verdict: Banks are better for borrowers prioritizing safety and security.

Pro Tip: Learn how to convince loaners for funding with our Pitch Deck Services.

Which is Better for Small Business Loans?

Choose Banks If:

  • You have a high credit score and meet stringent eligibility criteria.
  • You are looking for lower interest rates and longer repayment terms.
  • You don’t require urgent funds and can wait for the approval process to complete.

Choose NBFCs If:

  • You have a poor or limited credit history and need a more accessible lender.
  • You need funds urgently or prefer a simplified loan process.
  • You are looking for customized loan terms or short-term financing solutions.

Final Thoughts: Banks or NBFCs?

When it comes to small business loans, the choice between banks and NBFCs depends entirely on your business needs, financial situation, and urgency. While banks are ideal for established businesses seeking low-interest, high-value loans, NBFCs provide quick, flexible solutions for startups and small businesses.

Pro Tip:Always compare lenders, evaluate loan terms, and ensure you fully understand the repayment obligations before taking a loan.

Looking for experts to secure a small business loan?

Explore more funding options and prepare your business proposal with our Pitch Deck Services , or check out our Government Grants Services for additional support.

Disclaimer: The information presented in this blog is sourced from various online platforms and government portals.

Get started with Egniol today

Have a question or feedback? Fill out the form below and we'll get back to you as soon as possible.