Formal sources of finance are various financial institutions!
What is a financial institution? A financial institution is a regulated entity which distributes financial products loans, deposits,credit card and provides services like savings account, current account, letter of credit, guarantees etc. it can be either a bank or a non-bank financial entity. Though there is some difference in the way they can provide various financial services to you.
More than 90 per cent of small businesses in India do not access formal finance for their business requirements. They fund their business requirements through personal loans from informal channels or loans from family and friends and local money lenders. A business loan from a financial institution is good for you as:
1. Business loans from financial institutions is cheaper, or almost half the cost of informal finance. Capital saved from interest saving can meet other requirements of your business.
2. Business loans have longer repayment period as compared with informal loans, business loan from a financial institution has longer repayment period of up to 3-5 years, as against an average loan repayment period of 1 to 2 years for informal loans. If your loan is backed by any collateral like a residence, commercial premises, office (also known as mortgage loan or loan against property), the tenure can be as long as 10 to 12 years too! Know more about secured loans here..
3. Starting your relationship with a bank with a small business loan can go a long way towards timely securing a cost effective bigger loan for capital expenditure, when you really need a quick and cost efficient financing solution.
4. Consumer protection – As financial institutions are regulated entities you have access to a comprehensive consumer protection framework.