Why Should SMEs Choose NBFCs Over Banks?

The success of any business is related to its underlying business plan and the product/service it is selling and access to funding.

We believe that you have a great business plan; you may have hired the best brains to create your product/service but without sufficient finances, no business can take off successfully.

RBI is categorizing the SME sector as priority lending for the banks which is improving the access to finance, but with the increasing number of NPAs, funding is becoming a matter of concern for the SME sector as a whole. So what can SMEs do now? Opt for a business loan from a bank or get funding from NBFCs? Let’s find out.

NBFCs Growing with SMEs

The family owned structure of the Indian SMEs leads to the lack of proper financial planning which means there will always be a gap between funding requirements of SMEs. Banks dealing with bad debt due to multiple reasons are now unwilling to lend to small and medium business owners. And banks always insist on collateral securities for all types of business loans, but most of the time SME owners have nothing to pledge or they’ve already pledged their properties and other assets. That’s when NBFCs come to their rescue.

Non-banking financial companies are gradually trying to make their way through in the SME lending space. There are many reasons for the SME sector to choose NBFCs over banks and one of the most important reasons are easy documentation with lower TAT (turn-around-time).

NBFCs restructuring their business strategy for SMEs

Usually, NBFCs focus on the credit needs of corporate, but with a big gap in the SME market, they have now changed their strategy to offer more and more loans to the SME sector as a whole. They have started offering loan against property, small business loans etc.

As an SME owner, the only important thing is getting an easy loan option in the shortest possible time. The heavy paperwork and traditional sluggish loan procedure with banks are making SMEs choose non-banking finance companies.

Also the fact that banks ask for collateral security for all types of business loans for SMEs to evade any addition to the increasing NPAs means SME owners who can’t offer a collateral security are also preferring NBFCs. NBFCs have started offering business loans up to a certain pre-defined limit without the need of a collateral security which is a big relief for SMEs.

So which one should an SME owner choose? As an SME owner looking for a loan should give preference to an entity which disburses loan at a faster rate. Undoubtedly, non-banking finance companies are faster and have more options for SMEs including their LAP option.

Although banks and NBFCs are both offering SME loans but the increasing NPAs are forcing banks to seek collateral security for issuing loans and NBFCs are using it as a great advantage to break into the SME lending market.