Banks or NBFCs: Which is Better
for Your Business Funding?
Choosing between banks and NBFCs for business funding can be challenging. This guide explains the key differences, benefits, eligibility criteria, and top schemes from both to help you make an informed decision for your startup or MSME.
What is the Difference Between Banks and NBFCs?
When seeking business funding in India, entrepreneurs and MSMEs often face a critical choice: should they approach a bank or a Non-Banking Financial Company (NBFC)? Both play a vital role in providing credit, but they differ significantly in terms of regulation, flexibility, interest rates, and eligibility criteria.
Banks are traditional financial institutions regulated by the Reserve Bank of India (RBI) under the Banking Regulation Act, 1949. They offer a wide range of financial services, including savings accounts, loans, and government-backed schemes. Banks are known for their stability, lower interest rates, and access to government-subsidized loan programs like the Pradhan Mantri Mudra Yojana (PMMY) and Stand-Up India.
NBFCs, on the other hand, are financial institutions that provide banking services like loans and credit facilities but do not hold a banking license. They are regulated by the RBI under the RBI Act, 1934. NBFCs are known for their faster processing, flexible eligibility criteria, and willingness to fund businesses that may not meet traditional bank requirements. However, they often charge higher interest rates compared to banks.
Understanding these differences is crucial for startups and MSMEs to choose the right funding source that aligns with their business stage, financial health, and growth plans.
Why Choosing Between Banks and NBFCs Matters
The right funding source can accelerate your business growth, while the wrong one can lead to financial strain.
- Banks offer lower interest rates and government-backed schemes, making them ideal for stable, established businesses.
- NBFCs provide faster approvals and flexible eligibility, making them suitable for startups and businesses with limited credit history.
- Banks are highly regulated, ensuring security but with stricter documentation and collateral requirements.
- NBFCs are more adaptable to market needs and can fund niche or high-risk sectors like fintech, e-commerce, and agri-tech.
- Government schemes like Mudra Loans, Stand-Up India, and CGTMSE are primarily accessible through banks.
- NBFCs often fill the gap for businesses that do not qualify for bank loans due to credit score or collateral constraints.
Types of Funding Options
Bank Loans
Bank loans are the most common form of business funding in India. They include term loans, working capital loans, and overdraft facilities. Banks also offer government-backed schemes like the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), which provides collateral-free loans up to ₹2 crore. Bank loans are ideal for businesses with a strong credit history, stable revenue, and collateral to offer. However, the application process can be lengthy and documentation-intensive.
NBFC Loans
NBFCs offer a variety of loan products, including business loans, equipment financing, invoice discounting, and merchant cash advances. They are particularly useful for startups and small businesses that may not meet the stringent eligibility criteria of banks. NBFCs often use alternative credit assessment models, such as cash flow-based lending, making them more accessible to businesses with limited credit history. However, the interest rates are typically higher than those offered by banks.
Government-Backed Schemes
Several government schemes are designed to support startups and MSMEs through banks. These include the Pradhan Mantri Mudra Yojana (PMMY), which offers loans up to ₹10 lakh for micro-enterprises, and the Stand-Up India scheme, which provides loans between ₹10 lakh and ₹1 crore for SC/ST and women entrepreneurs. The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE) is another popular option, offering collateral-free loans up to ₹2 crore. These schemes are typically disbursed through banks, making them a cost-effective funding option.
Alternative Funding from NBFCs
NBFCs also offer innovative funding solutions like peer-to-peer (P2P) lending, invoice financing, and supply chain financing. These options are ideal for businesses that need quick access to funds without the hassle of traditional loan processes. For example, invoice financing allows businesses to borrow against unpaid invoices, while P2P lending connects borrowers directly with lenders through online platforms. These alternatives are gaining popularity among startups and MSMEs due to their speed and flexibility.
Top Funding Schemes from Banks and NBFCs in 2026
Pradhan Mantri Mudra Yojana (PMMY) - Bank Scheme
- •Offers loans up to ₹10 lakh for micro-enterprises under three categories: Shishu (up to ₹50,000), Kishor (₹50,000 to ₹5 lakh), and Tarun (₹5 lakh to ₹10 lakh).
- •No collateral required for loans up to ₹10 lakh.
- •Available through public and private sector banks, regional rural banks (RRBs), and microfinance institutions.
- •Interest rates are competitive and linked to the base rate of the lending institution.
Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE) - Bank Scheme
- •Provides collateral-free loans up to ₹2 crore for micro and small enterprises.
- •Guarantee cover of up to 75% of the loan amount for loans up to ₹2 crore.
- •Available through scheduled commercial banks and select regional rural banks.
- •Ideal for businesses that lack collateral but have a viable business plan.
Stand-Up India - Bank Scheme
- •Targets SC/ST and women entrepreneurs with loans between ₹10 lakh and ₹1 crore.
- •Loans are available for setting up greenfield enterprises in manufacturing, services, or trading sectors.
- •Includes a composite loan covering 75% of the project cost, including term loan and working capital.
- •Interest rates are linked to the base rate of the lending bank, with a maximum spread of 3%.
NBFC Business Loans - Flexible Funding for Startups
- •Offers quick approvals and disbursals, often within 48 hours.
- •Flexible eligibility criteria, including cash flow-based lending for businesses with limited credit history.
- •Loan amounts range from ₹50,000 to ₹50 lakh, depending on the business profile.
- •Interest rates are higher than banks but offer greater flexibility in repayment terms.
Eligibility Criteria
For Bank Loans
- •Business must be registered as a sole proprietorship, partnership, private limited company, or LLP.
- •Minimum operational history of 2-3 years for most schemes (exceptions like Mudra Loans may require less).
- •Good credit score (typically 700+ CIBIL score for business loans).
- •Collateral may be required for loans above ₹10 lakh (exceptions under CGTMSE).
- •Detailed project report (DPR) and financial projections for term loans.
For NBFC Loans
- •Business must be operational for at least 6-12 months (varies by NBFC).
- •Minimum monthly turnover requirements (typically ₹50,000 to ₹1 lakh).
- •Flexible credit score requirements (some NBFCs approve loans with CIBIL scores as low as 600).
- •No collateral required for most unsecured business loans.
- •Cash flow-based lending models may be used for businesses with limited credit history.
Documents Required
Standard documents required for applying to banks or NBFCs:
How Info Tree Services Helps You
Info Tree Services provides end-to-end support for securing business funding from banks or NBFCs.
- Assess your business profile and recommend the best funding option (bank or NBFC).
- Prepare Detailed Project Reports (DPRs) and business plans tailored to bank or NBFC requirements.
- Assist with documentation and application filing for government schemes like Mudra, CGTMSE, and Stand-Up India.
- Liaise with banks and NBFCs to expedite approvals and disbursements.
- Provide post-approval support, including compliance and repayment planning.
Common Myths About Banks and NBFCs
Who Can Apply?
- Startups registered as private limited companies, LLPs, or sole proprietorships.
- MSMEs with Udyam registration and a minimum operational history of 6 months.
- Women entrepreneurs and SC/ST entrepreneurs under the Stand-Up India scheme.
- Micro-enterprises seeking loans up to ₹10 lakh under the Mudra Yojana.
- Businesses with limited collateral seeking collateral-free loans under CGTMSE.
- High-growth startups and niche businesses that may not qualify for traditional bank loans.
Complete Documents Checklist
Use this checklist before submitting your application:
- •Aadhaar card of the business owner(s).
- •PAN card of the business owner(s) and the business entity.
- •Passport-sized photographs of the business owner(s).
- •GST registration certificate.
- •Udyam registration certificate (for MSMEs).
- •Partnership deed or incorporation certificate (for companies/LLPs).
- •Detailed Project Report (DPR) with business plan and financial projections.
- •Quotations for machinery, equipment, or other assets (if applicable).
- •Proof of business address (rent agreement or property papers).
- •Bank statements for the last 6-12 months.
- •Audited financial statements (balance sheet, profit & loss statement) for the last 2-3 years.
- •Income Tax Returns (ITR) for the last 2-3 years.
- •Collateral documents (property papers, vehicle RC, etc., if applicable).
- •Proof of business continuity (utility bills, invoices, etc.).
- •Any other documents specified by the bank or NBFC.
- •Aadhaar card of the business owner(s).
- •PAN card of the business owner(s) and the business entity.
- •Passport-sized photographs of the business owner(s).
- •GST registration certificate.
- •Udyam registration certificate (for MSMEs).
- •Partnership deed or incorporation certificate (for companies/LLPs).
- •Detailed Project Report (DPR) with business plan and financial projections.
- •Quotations for machinery, equipment, or other assets (if applicable).
- •Proof of business address (rent agreement or property papers).
- •Bank statements for the last 6-12 months.
- •Audited financial statements (balance sheet, profit & loss statement) for the last 2-3 years.
- •Income Tax Returns (ITR) for the last 2-3 years.
- •Collateral documents (property papers, vehicle RC, etc., if applicable).
- •Proof of business continuity (utility bills, invoices, etc.).
- •Any other documents specified by the bank or NBFC.
How Info Tree Fits Into Your Journey
From eligibility check to disbursement — Info Tree handles every step:
- Free eligibility assessment to determine the best funding option (bank or NBFC).
- Preparation of Detailed Project Reports (DPRs) and business plans tailored to your funding source.
- Documentation support and application filing for government schemes or NBFC loans.
- Coordination with banks or NBFCs to expedite approvals and disbursements.
- Post-approval support, including compliance, repayment planning, and growth advisory.
Conclusion:
Choosing between banks and NBFCs depends on your business stage, credit profile, and funding needs.
- Banks are ideal for stable businesses with strong credit history and collateral, offering lower interest rates and government-backed schemes.
- NBFCs are better suited for startups, high-growth businesses, or those with limited credit history, offering faster approvals and flexible eligibility.
- Government schemes like Mudra, CGTMSE, and Stand-Up India provide cost-effective funding options through banks.
If you're unsure which option is right for you, act now to secure the funding your business needs.
- Assess your business profile and funding requirements.
- Compare interest rates, eligibility criteria, and repayment terms.
- Prepare your documentation and business plan for a smooth application process.
How Info Tree can help you get started:
- Book a free consultation with our funding experts to assess your eligibility.
- Get end-to-end support for preparing your application and documentation.
- We stay with you until the funds are disbursed and your business is on the path to growth.