One of the major hurdles faced by any business is capital. Be it a growth project, purchasing a new machinery or meet their working capital requirements, all businesses need funds. Be it a start-up or an established business, they need capital infusion from time to time to grow and sustain operations. Businesses have four options when it comes to raising funds:-
• Crowdsourcing • Venture capital • Angel Investor • Business loans
The most viable and the reasonable option are business loans from banks and non-banking financial institutions. All major banks and financial companies provide small business loans for start-ups or other business ventures in need of funds. The eligibility criteria to obtain small business loans differ from lender to lender, banks have more stringent rules as compared to non banking financial institutions.
Small Business Loans from Banks v/s NBFC
Lending to start-ups or small business is always a risk and therefore banks tend to be lot more careful while lending to such businesses. Also these are generally unsecured loans because most small businesses do not have any assets to pledge as security. The risk to the lender is high and therefore banks prefer to cover the risk by way of stringent verification and evaluation and higher interest rates.
NBFC on the other hand, are slightly more relaxed when it comes to the lending criteria. Also most of these are small companies with most of their operations being online, have less man-hour consumption and therefore pass on the savings to the borrowers in terms of interest rates. Their interest rates are slightly better than traditional banks and again unsecured loans command a higher rate of interest as compared to secured loans. Also since most of their process is online, the application process of NBFC isn’t very extensive or time-taking. As long as you fulfil the eligibility criteria, all you need to do is fill in the form online, upload soft copies of documents and submit. The approval comes quickly and money is disbursed to your account within 24-48 hours.
Banks follow the traditional application process which requires you to visit the branch, fill out the application form and submit all documents physically in the bank and then wait. Since the process is manual, the entire process can take from over a week to a fortnight.
Another point which needs mention is that banks are weary of small businesses and therefore may not lend to businesses which have just started out or do not have profitability to show. Also in case of unsecured loans, businesses only want to lend to lend to individuals with a good credit score or history. A start-up is unlikely to have a credit record or profitability and therefore may find it difficult to obtain finance from a baks. Fin-tech companies or NBFC on the other hand, are more open to lend to businesses that have just started or those that don’t have a credit record albet at a slightly higher interest rates.
Related post - 4 Small Business Financing Options in India - (Click here)