What Business Borrowers Should Know about Credit Unions

David NayorSmall Business

Credit unions originated in Germany in the early 19th century, and they have existed in the United States for over 100 years. Today there are over 7,000 credit unions in the U.S. with an estimated 96 million members, or 43.7% of the economically active population. They provide an alternative solution to banks, offering similar financial services but under a very different foundation. Members pool their funds together to provide loans and make investments. Credit unions are able to make small business loans, including SBA loans that are guaranteed by the U.S. Small Business Administration. Credit unions are not-for-profit entities, thus each member is a partial owner and has a say in managing the funds. These financial associations are often able to offer lower loan interest rates to their small business borrowers and higher interest rates to their depositors as a result of their tax-exempt status.

Industry guidelines dictate that credit union members must be connected by a common “bond” – a shared occupation, membership in an affiliated organization, or community where they work or reside. Membership ranges from a single-digit group of individuals to having millions of participants. Many larger credit unions permit people to join an affiliated association (frequently a charity) to satisfy the common bond eligibility requirement. Usually the designated association charges a small fee to join. Membership fees and rates vary by credit union, but the average cost of purchasing an initial share ranges between $5 and $10. Online databases such as aSmarterChoice and CULookup allow searches by location or affiliation to find the most appropriate credit union for an individual’s situation.

Although not-for-profit, credit unions are regulated within national standards similar to other financial institutions. Under FDR’s New Deal in 1934, the National Credit Union Administration (NCUA) was founded to oversee all organization activity. A credit union can either be chartered by the state government (CU) or the federal government (FCU). This distinction does not affect the way in which an FCU is run versus a state-chartered CU, but simply means that an FCU operates under federal banking laws as opposed to state laws. Just as bank deposits are insured by the FDIC, deposits of a federally chartered credit union are insured by NCUSIF (National Credit Union Share Insurance Fund), which is also backed by the full faith and credit of the U.S. government. Deposits of a state chartered credit union may be insured by private insurers.

Although holding only a small fraction of all U.S. banking deposits, these organizations continue to grow in popularity with business borrowers. Credit unions tend to take a deeper look into the applicant’s full financial history and pull from various data resources, instead of using a compressed credit score to make the final decision. The relationship that develops through credit unions between borrower and lender is often more personal. The borrower is encouraged by a support team, and in turn may feel a greater responsibility to repay the loan. There is huge merit in this increased incentive.

If you have been following the growing market of alternative online lending, the now popular peer-to-peer lending (P2P) sites appear to have taken their cue from credit unions where the lenders and borrowers are essentially peers. P2P platforms market themselves as a more efficient alternative to traditional methods, but these models may not be as innovative as they seem. At its core, P2P lending is a simple rebranding of the credit union establishments currently in place. However, P2P lenders cannot deliver the financial services or the federal insurance provided by a credit union. Plus, generally these platforms are unable to offer the lower borrowing rates and personal service that small business owners find at credit unions.

Numerous BoeFly deals have been financed by credit unions, and their member representatives continue to be active lenders in the marketplace. Credit unions are a great option when seeking a small business loan or the establishment to manage your finances.

Works Cited

“Credit Union Difference.” aSmarterChoice. 2010.