Is it Better to Get a Business Loan From a Bank or Finance Company?

Are you looking for small business loans to grow or expand your business? You will find a plethora of choices. While traditional banks have always been available to offer loans, you will find many more options today, such as finance companies, non-banking finance corporations, private lenders, and more.

One of the first questions that might pop into your mind is whom to approach for a business loan. Should you go to a traditional bank, or will a modern/advanced finance company suit your needs?

This blog will help you understand more about choosing the right option when seeking financial assistance for your business.

Before we get into the details, here is the answer to the main question—we cannot pinpoint one particular option and declare it the best loan provider. The choice will depend on your business’s requirements and other factors. We will see more of these in the following sections.

Bank vs finance company

Wondering which one offers the best business loans? Here are some factors you should consider before choosing the one that suits your requirements the best.

Size and age of business

If you have been in the business for a long time, and if the size of your business is quite big, you can choose a bank for financial assistance. Traditional financial institutions like banks look for the history, long-standing nature, creditworthiness and size of the businesses before approving their loan application. 

However, if you are a newbie and don’t have much credit history to show, you can approach a finance company for your loan. Yes, the interest rates may be higher than what banks would charge you, but you can be assured that your loan application will not be rejected by these companies. If you are looking for a small business loan, a finance company would be the better choice for you.

Documentation and collateral requirements

Banks require you to submit detailed documentation, business reports (like financial statements, tax return copies, etc.) and collaterals before approving your business loan. The process of loan disbursement is slightly longer here, because banks need to check all these documents, verify the authenticity and then proceed to approving the payment. So, if you have enough documentation and collateral, the banks require, you can approach them for your business loan requirements.

However, if you have a newly established small business, you may not have the necessary financial documentation and collateral that banks demand. In that case, you can opt for a finance company for financial assistance. This is because the loan formalities of these lending agencies are quite flexible, and most don’t require businesses to submit any collateral before approving loans.

Affordability

You will notice a stark difference in the interest rates charged by finance companies and banks when you apply for a business loan. The former often has higher interest rates than the latter because of their flexible processes, quicker process time, simpler documentation, non-requirement of collateral and other reasons. 

On the other hand, banks charge reasonable interest rates because they follow a more systematic and rigorous loan approval process. You can opt for a finance company if you can afford the high interest rates they charge. Small businesses may not be eligible for business loans from banks; hence, it is highly recommended to go for finance companies only if the interest rates fall within your budget.

Waiting time

Are you in urgent need of a business loan in India? Approaching a bank may not be the right option for you in that case! Even if you submit all the documentation on time, banks take a long time to check and verify it before sanctioning the required loan amount. Usually, you receive the funds in your account only after a few weeks from submitting all the documents and financial reports.

Finance companies, on the contrary, have quicker processing times because their loan approval process is very flexible. Once you have submitted the basic information required by these firms, you can expect the funds to be credited to your account within 24 to 48 hours. So, if you are hard-pressed for funds in your business, approaching a finance company would be the right option.

Conclusion

As you can see, banks and financial companies have their own merits and demerits when it comes to loan approvals. Hence, it is always better to assess your requirements first and then choose your lender wisely for the best possible results. For example, business loans for small business owners may be more practical when taken from a finance company than a bank.

If you are a small business looking for quick business loans, you can approach TallyCapital right away. If you are using TallyPrime as your business software, all you need to do is select the add-on feature, TallyCapital, for quick business loans. 

Once you check your eligibility and apply for your business loan here, TallyCapital connects you with the relevant financial partner to ensure you get the funds into your account as early as possible.