Any business model in India requires funds for capital expenditure and well as working capital to take care of routine operations. In the course of running a business, fund requirements vary depending on factors specific to the nature of business. The necessity of additional funds whether it is for working capital to streamline cash flow, for expansion and diversification of the business, you have approached a suitable lender for a business loan in alignment with the need. In India, the conventional institutional lenders have always been Banks and large NBFCs with an array of credit solutions to meet every necessity of a business enterprise. Of late, there has been a spurt of Fintech companies on the horizon, charting a different course in the sphere of organized lending to small business, offering them a seamless experience in the process.
Where to borrow a business loan?
In the present scenario in India, the pertinent question to ask is whether to seek a business loan from NBFC or a Bank. The contours of banking services are fast changing with rapid absorption of technology and customer preferences looking for alternative sources of banking experience. The quick generational adaption to innovative ideas and the changing pattern of sourcing funds, make it incumbent upon you to gain insight into the different aspects of Banks and Online Lenders so that you can make an informed decision.
Banks vs. Online Lenders:
Banks are the mainstay of banking services in the country with an array of products covering both deposits and credit. In the advent of NBFC, more so of the digital variety, they are empowered to function in the area of lending only without the facility of seeking deposits. Let us see the basic differences between the two.
- Banks: The Indian banks are regulated by the Reserve Bank of India Act of 1934 and the Banking Regulations Act 1949. There are both Private Sector and Public Sector Banks, wherein the latter, the Government of India, holds a percentage of the stake. They have a definite structure modeled with hierarchy ending in branches at the grass-root level. Banks are empowered to offer all types of financial services to its customers, covering deposits, lending, and
- NBFC: The name itself is suggestive of its area of operations. It is a privately held enterprise registered under the Companies Act 1956, providing services to customers similar to banks. They can indulge in the credit business, but not seek deposits from the customers. However, they are regulated by the RBI and other Government agencies. In the case of Online Lenders or Fintechs as they are generally called, are primarily NBFCs, which operate completely out of the digital platform and extend loans to small business people.
Strengths and Weaknesses of Banks and Online Lenders:
| Strengths | ||
| Type | Banks | Online Lenders |
| Nature | Traditional | Innovative |
| Scope | All types of Financial services | Service confined to credit |
| Client Relations | Personal in extensive touch-points / branches. | Virtual on the digital platform only |
| Product Pattern | Conventional banking | Attuned to current trends |
| Weaknesses | ||
| Type | Banks | Online Lenders |
| Nature | Brick and mortar existence | Digital Platform |
| Rules | Stringent | Relaxed but at a higher cost |
| Systems | Cumbersome | Simple but only in digital format |
| Experience | Loyalty based evoking trust in the system. | The virtual world lacks an element of trust. |
The outcome – Banks or Online Lenders:
By now, you are familiar with the various nuances that differentiate the operations and the services rendered by Banks and Online Lenders or Digital NBFCs in very general terms. Yet you need clinching logic to decide upon what is preferable- business loan from Bank or business loan from NBFC? Let us look:
| Clinching Features | ||
| Type | Banks | Online Lenders |
| Interest rates | Based on MCLR as per RBI stipulations making the offer rates rigid | Based on PLR not under RBI supervision allowing larger flexibility in offer |
| Loan Amount | The range can be high as they can be both secure and unsecured, depending on the proposal. | Can be higher than banks in specific cases, but the upper limit so far offered is not greater than Rs.2C |
| Loan Margin | Banks insist on a margin | Depends on the type of loan. In some cases, it is waived. |
| Processing Fees | Variable and upfront | 1 to 2% generally |
| Paperwork | Stringent documentation process | Need-based documentation in the digital format. |
| Credit Score | Banks strictly follow norms | A relaxed and low credit score is also accommodated with a higher rate of interest. |
| Proposal Size | No limits | Limited to small ticket loans |
Conclusion:
Considering all the aspects, it is safe to bank with the traditional banking institutions if trust and loyalty is the prime driving force. You can enjoy one to one relationship and may not be technically savvy to deal with the digital platform presented by the online lender. On the other hand, the Millennials are more at ease working on such a platform. Online lenders also have an edge with regard to relaxed parameter, including your credit score, which banks are more rigid. Overall, depending on the circumstances, your necessity and finally your profile, you have to arrive at an informed decision as which is better – a business loan from Bank or a business loan from Online lender.
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