Over the last couple of decades, Non-Banking Financial Institutions (NBFCs) have emerged as a convenient, affordable, and quick source of borrowing for SMEs particularly in remote areas where banks may not be in abundance.
Despite MSMEs key contribution to the Indian economy, their contribution remains well below the true potential. Indians MSMEs share in total GDP is around 29 per cent even as the global average stands at 49 per cent. One of the key reasons for this below par contribution is the lack of formal credit available for SMEs. Over the last couple of decades, Non-Banking Financial Institutions (NBFCs) have emerged as a convenient, affordable, and quick source of borrowing for SMEs particularly in remote areas where banks may not be in abundance. Due to RBI regulations and market dynamics, their interest rates are also very competitive, and way below informal lenders.
This makes NBFCs an obvious choice for SMEs looking for working capital, business expansion or diversification, or simply foreclosing an expensive informal loan. Here are the five things that SMEs must have in their checklist before picking the right NBFC:
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Documentation: This is the most tedious step in the entire loan cycle. While certain KYC steps are mandatory as per RBI guidelines, some NBFCs take additional precautions while lending to SMEs with insufficient credit profile. “This could mean margin money guaranteed by company directors or outsiders and so on. Choose the NBFC which minimizes the documentation process and has a quick disbursal cycle,” Rajesh Gupta, Founder, Cash Suvidha told Financial Express Online. This allows the business to focus on core operations rather than arranging for documentation formalities.
Interest Rates: It goes without saying that the first factor in getting a loan is the interest rate as even a couple of percentage points could make a huge difference to the EMI. “Therefore, SMEs should do a thorough check on the market and evaluate the rate of interests offered by 8-10 NBFCs. For a big-ticket loan, i.e., above Rs 10 lakh, there is also a possibility to further negotiate with the lender and ensure the best rates,” said Gupta. Moreover, it is also important to keep an eye on the money market to understand the long-term trends in interest rates. The borrower can accordingly choose between a fixed rate or a floating rate deal. These considerations help the business optimize its cash flow in the long run.
Customer interface: While paying too much attention to interest rates etc., MSMEs miss reviewing the customer interface offered by the NBFC lender. “Think of a situation when you have to visit the branch every time you would like to pay an additional amount over and above the EMI or want to update your office address in lender’s records. A lender who provides these basic services over a seamless digital platform will be extremely convenient in the long run, as opposed to another who still follows the copybook processes,” said Gupta.
Terms and Conditions: Typically, the loan payment is done in monthly EMIs. However, some NBFCs may provide flexibility regarding repayment terms. For instance, weekly or fortnightly payments or no penalty for missing an EMI (if you have duly informed the lender along with the reason). Such offerings make for an ideal deal for SMEs as they work in an extremely volatile financial environment.
Add-on Benefits: Financial needs in a business could be extremely dynamic. Therefore, it is better to have some additional financial cushion such as an overdraft facility. While SMEs often choose the first lender ready to transfer money into their account at an affordable interest rate, such add-on benefits should not be ignored.
While an NBFC lender may not provide all the above, the SME borrower should look at the best possible combination that works for a particular business. “Ultimately, it is creating a long-term deal for yourself. The right NBFC lender could partner in your business growth and take it to new heights,” Gupta added.