The pros and cons of banks vs. credit unions for franchise lending

Jessica SarterFranchise Finance

Searching for the best business loan to fund your latest franchise business operation will involve investigating the options presented by a number of different financial institutions. Whether you're interested in conventional financing or loans backed by the Small Business Administration (SBA), you'll most likely be dealing with either banks or credit unions. 

You'll have a major decision to make if you're presented with the option to choose between a bank or a credit union for the franchise business start-up loan you need. It'll be necessary to closely weigh the options of all available institutions (in both categories) and figure out what will best serve your purposes.

The difference between a bank and a credit union
While you might be entirely aware of what both of these types of institutions are, it's important to illustrate the difference between the two.

The majority of the banks you encounter in your search for a franchise lender will be retail or business banks, whose primary customers are individual consumers, small businesses and mid-size companies. All of these banks make money by lending to their customers, based on the funds they hold on behalf of their depositors.

Credit unions, meanwhile, are not-for-profit institutions, owned collectively by all of the members who have accounts in the union. Membership is, by law, restricted by certain criteria – some credit unions serve the employees of a given business or organization, while others are community-based and only allow members of that community to join.

Choosing between a bank and a credit union for your franchise loan
The main advantage that banks have over credit unions is that membership isn't restricted in most retail banks, unlike unions – anyone who deposits the minimum amount required to start an account can do so. Additionally, the average bank that's part of a large franchise, such as Bank of America or Sovereign Bank, will have a greater base of depositors to draw from, and thus may be more willing to give out larger loans to borrowers. Finally, in most areas of the U.S., banks are more common – and a great deal easier to find – than credit unions.

With that said, if you are eligible to become a member of a credit union, it's certainly worth considering. Although such an institution's finances are determined solely by the total amount of its members' deposits and are therefore somewhat limited, credit unions are often able to offer lower interest rates and fees.