Why it’s Cheaper to Avail Business Loans from Banks than Private Online Lenders?
You have two ways to avail a business loan, one is through a bank, and the other is through a private online lender that excel in providing loans. Both ways come at different price and offer different pros and cons. But one thing is a fact, and that is banks offer the cheapest business loans
out of all the lending institutions.
Let’s see some of the reasons as to why it’s cheaper to avail a business loan from banks than from a private online lender.
• It’s their money: If you’ve ever wondered why the bank is so interested in opening as many bank accounts as possible, then it’s because they make money that way. More the number of people open bank accounts, more money they’ll make. When bank account holders deposit cash in the bank, they’re indirectly giving the banks the right to use their money. For which they receive yearly interest also. The banks use the funds to lend it to creditworthy borrowers or invest in other ventures like mutual funds, hedge funds and businesses that are guaranteed to prosper in the coming years. The banks have enough money to lend without even asking the RBI for extra funds, though occasionally banks do lend money from the RBI. In the maximum cases, the money lent to businessman and entrepreneurs is their money. Since it's their money, they can offer attractive rates to the borrowers. In cases when they borrow money from the RBI, they get cheap rates from the RBI and in return, they manage to offer loans at the same rates as before. Whereas, a private lender gets its funds from individuals who want to now become an investor or from venture capital firms. Since they get their funds at a higher price, the same will be imposed on the borrowers.
• Lending to only creditworthy borrowers: Banks, unlike other private online lenders, do not entertain risk. They believe that slow and steady wins the race, which is by far true. They only lend money to borrowers that are considered low risk. This brings down their risk and spring out a sense of certainty that the loan amount will be repaid without defaulting. On the contrary, the private lenders will be willing to make loans available to high-risk borrowers but at a higher price. The idea is to have a bigger cushion in case things don’t work out.
• Restrictions on lending: Banks have strict lending policies because it’s the money of the general public that is being lent. So, they just can’t think of risking it. The banks only lend business loans to business owners who are well established in the market and sees no or minimum risk in them. This is good for the business owner as they get to avail the loan at a lower price and banks get to earn money risk-free. The banks do not lend money to start-ups and businesses who are not established in the market for a minimum of 3 years. Whereas a private online lender will make loans available to start-ups and other businesses but at a higher price.
• Not lending to poor credit borrowers: A credit score tells how creditworthy a borrower is. A borrower with good credit score means he’s been loyal and punctual towards his loan repayments and vice-versa. Applying the same logic to business loan borrowers, the bank scrutinizes borrowers who have compelling credit score and credit history and make loans available to them. On the contrary, a private online lender will ignore the credit score and make the loan available but at a very high price.
• Speed comes at a price: You all know buying a sports car is costly because it offers a speed that nobody else, and hence it comes at a price. Same is true with loans also. Making loans available faster to the borrower is not an impossible task, but it’s a costly task. Whereas the banks make everything available at reasonable prices, they do not want to charge the borrowers with extra interest only because they made loans available to them a day before the traditional time. The borrower also understands and is willing to wait for a day more.
• Ease of availability: The comfort of availing a loan online is unmatchable. You don’t have to go anywhere, just tap on your phone screen and the loan gets credited to your account. Whereas, while availing a loan from a bank, you at least must visit the bank twice in the entire loan availing process. And this seems to be a strenuous task, but hey let’s make this task of yours super easy. How? We excel in making loans available to you from top banks and NBFC at unhampered prices. Also, we don’t charge you anything for this service. So, you get the loan at your comfort. For this comfort, private online lenders make loans available at a higher interest rate.
As a businessman, you must go with the ways where you can reduce your cost. Always avail loans from banks because why do you want to pay more when you can pay less for the same commodity?