A common question that arises whenever you want to avail of short term finance is, “Which one is better? Banks or private lenders?” Each one has its own pros and cons. Let us give you a quick idea about the advantages and disadvantages of both for short term finance. However, first, you need to know what a short term loan is.
These loans are capable to meet your needs if you are not able to acquire credit from banks for more than 1 year. Short term loans in India can provide you a short tenure for less than one year. They have easy repayment process and are flexible. Short term loans interest rates are normally lower.
Now, every business owner wants their short term loan sources to be a bank whenever they need a business loan or a short term loan. You may want to ask, why? Is it only because banks offer lower interest rates? Why do banks offer lower rates even?
Here are the reasons why banks offer lower interest rates:
Banks have a lower cost of funds than private lenders. Depositors help the banks while keeping large amounts of money in their accounts. Thus, banks have easy access to funds.
Banks have access to federal funds. The federal funds rate is currently 2.5%, which is very cheap considering the past rates.
Why can’t the private Lenders give lower interest rates?
Short term loan sources for private lenders are other banks who lend the funds at higher rates than what it costs them to acquire the fund. To summarize this, a private lender’s cost of acquiring funds gets passed on in their loan rates.
Short term loans from banks vs. private lenders: A bipartite situation
The grass is not always greener on the other side. Banks may give you a lower interest rate but short term loans from a bank are hard to get. They have strict regulations that bar them from lending money to any new or small or growing business or individual. Private lenders, on the other hand, have no such restrictions or regulations to lend money to anyone. They don’t have any alternative ways to generate revenues even.
Banks make money easily while giving loans. Their main focus is beating their competitors, i.e. the private lenders. Suppose the private lender that you have chosen is giving you the money at 11% interest. All that is a bank has to do to turn your attention towards them is to charge 10.5%. They can win the match with that only. So, when you are thinking that you did a good job choosing the bank, you may never think that the amount that you are paying as the interest is only a bit less than the private lender.
Bank loans are hard to get even with lower interest rates because of their restrictions. Loans from private lenders are easy to get with higher interest rates.
However, if we go back to the original question, which one is better? The answer is, which one is easier to get. If you qualify for a bank loan then you are lucky. However, if not then you need to grow your business to that level where banks can easily lend you the amount. In the meantime, if you are eligible to apply for short term loans then it is better to avail of that rather than losing your business altogether.
So, whenever you are asking for a short term loan or a business loan, consider the one that you are getting the maximum profit from or the one that you are getting approved by. It really depends on only you which one is better, banks or the private lenders.