Small and medium enterprises (SMEs) now have a plethora of options for receiving financing to keep their businesses going or even expand their business. Most of the banks offer special schemes for SMEs. Similarly, many non-banking financial companies (NBFCs) also offer lines of credit to SMEs.
How should you choose the revolving line of credit that is right for you? Is it better to go with a trusted bank, or should you try your hands with an NBFC? Here is a summary of each of the options to help you choose the right line of credit.
1. What is a revolving line of credit for businesses?
A line of credit for a business is a revolving credit facility where a borrower is issued with an agreed amount of capital for a specific duration. The applicant can use the capital as and when required. There is no need for the business owner to withdraw the entire loan amount at once.
In this case, the interest rate is applied only to the withdrawn amount and not to the entire loan amount sanctioned. Once the principal amount is repaid, the business owner becomes eligible to apply for the revolving credit.
2. How to choose between banks and NBFCs?
There are various factors one must assess before choosing a lender for revolving credit.
- Interest Rate:
Check for the interest rates applicable and the way interest is calculated on your line of credit. NBFCs offer a lower interest rate on unsecured loans, unlike the traditional banks, where the interest rate is linked to the Marginal Cost of Lending Rate (MCLR). MCLR is the minimum interest rate as instructed by RBI, the lower limit for lending to a bank. NBFCs follow a flexible interest rate structure, which can increase or decrease at any time.
- Credit Score:
The minimum credit score requirement for banks and NBFCs are different. While banks require a high credit score to pass the eligibility test, NBFCs are not as rigid in this matter.
- Eligibility Criteria:
The eligibility criteria for revolving credit offered by NBFCs are much lenient compared to that of traditional banks. Banks may also offer a certain loan-to-value ratio, while the NBFCs hand-over the entire capital for an unsecured business credit line.
NBFCs follow minimum paperwork and documentation as that of traditional banks. Banks include a strict policy regarding the paperwork and the documentation that must be provided to avail the line of credit.
Like the other cases, banks include a strict and rigid set of policies to issue a credit line to businesses. Whereas the policies of NBFCs are much lenient as they provide instant credit approval decisions.