Initial capital is one of the most important components for starting a new business venture along with the basic business plan. In India, most of the aspiring businessmen lack the initial capital to execute their excellent business ideas. Raising a fund is a difficult task while starting up a brand new business. The availability of timely finance and quality of funding is a vital element for every new small scale business to succeed. Hence, it’s essential to arrange adequate finance for your new business ideas to take off and reach new heights. Exploring the best finance options for fixing up sufficient funds along with hiring quality minds is the primary task for every entrepreneur to execute their business plans successfully.
There are mainly two types of funding options for your new business – the bank loans or the loans from NBFCs (Non-Banking Financial Companies).
A small business venture often finds it difficult to get a bank loan as the Indian banking system has some stringent lending rules and prefers doing business with existing and running businesses. Banks are pickier when it comes to lending to small business ventures. In comparison to banks, non-banking financial companies (NBFCs) are better suited finance partners for small and the mid-sized enterprises. Quickness and flexibility are two of the main components that are needed to serve the evolving financial needs of the SME segments.
Emerging small scale enterprises are the backbone of our economy. However, when it comes to lending, Indian banks have failed in serving the financial needs of SMEs by adopting a stringent approach with the concern of rising non-performing assets. At the same time, the non-banking financial companies are in their transformation phase and are giving a tough competition to the banks in the credit market. According to the latest RBI data, there is a rapid growth in the credit portfolio of the NBFCs and a declining rate of growth in the banking credit industry. This shows how SMEs are turning to the non-banking lenders for their financial needs.
Here are some of the reasons why NBFCs score more over bank loans in lending credit to the SME segment
Quick Turnaround Time: Unlike banks, the non-banking financial companies process the SME loan quickly. Banks consider it quite risky to lend to the small enterprises. Hence they take a longer time to review and verify the loan applications and the credentials to process it further. They also follow stringent and strict guidelines. On the other hand, the non-banking financial companies have over time understood the impact of timely financing on small scale enterprises. As a result, NBFCs are helping the small and medium enterprises (SME) sector to grow in the Indian economy by filling this credit gap by processing the loan application quickly. Easy financing offered by the non-banking lenders have considerably helped the small scale sector and aspiring entrepreneurs to kick-start their businesses.
Competitive rate of Interest: When you think of availing finances for your business, interest rate is the first component that you look at. Reasonable interest rates ultimately result in lower EMIs. Depending on the type and the size of the business, non-banking financial companies offer competitive lending rates to address the need of funds for small scale entrepreneurs. Credit history and the nature of the business also play major roles in getting the loans sanctioned at reasonable and competitive rates.
Ease of Reach: One could set up a business, be it small or big, only after procuring the right amount of finance at the right time. Adequate financing is necessary to arrange for business equipment and also to hire the best minds to work on the business idea. For a yet-to-be-established small business enterprise, the non-banking financial companies are more easily approachable than the traditional banks. Small and medium enterprises can avail business loans of up to ₹1 crore without any collateral from both banks and non-banking financial companies. With growing bad debts and non-performing assets, banks have become selective in their approach towards such lending. On the other hand, non-banking financial companies are increasingly looking at offering loans to small and medium enterprises (SMEs). There are many non-banking lenders like small finance companies and MFIs (Micro-Finance Institutions) which are addressing the diverse and evolving financial needs of small and medium enterprises.
Qualifying Criteria: The SME segment is diversified in nature and many of the businesses here fail to provide any collateral or proper documentation. Because of this reason, banks have exhaustive lists of loan prerequisites. However, in recent years, non-banking financial companies with their local presence have started looking at the SME segment as a target market. NBFCs follow a unique model of underwriting which helps the small businesses to secure their finances with comparatively lesser paperwork and prerequisites. NBFCs adopt a differentiated approach towards underwriting. This is done by conducting several background checks and considering alternate records to evaluate the eligibility of the borrower. Their unique method of analysing the credit worthiness of enterprises based on their economic activities helps an entrepreneur to procure credit in spite of having a traditionally low credit scores. Usually, banks do not provide loans to the entrepreneurs with low credit scores. Credit history is evaluated using traditional parameters and banks categorize the risk profile of a borrower based on the credit score. On the other hand, non-banking lenders use an informal way to check the credit history and extend the credit facility to entrepreneurs with lower credit scores if the borrowers meet the other criteria. However, non-banking financial companies tend to operate with high margins of risk and default.
Conclusion
It is beneficial to pick non-banking lenders for small and medium enterprise loans as they are easy to reach, ask for less documentation and are flexible with competitive lending rates. Though NBFCs and the banks have lots of similarities when it comes to lending, NBFCs target small to medium scale enterprises. Unlike banks, NBFCs are not very stringent with regards to paperwork, prerequisites and eligibility criteria while processing the credit application. Quicker processing, instant approvals, considerations, on credit scores, etc. make non-baking lenders a better pick for small and medium enterprises loans.