Credit Unions – Everything You Need to Know

more appealing than their better-known siblings – banks – when it comes to the business financing products and options they offer?

Indeed, credit unions often provide more affordable repayment terms than banks. This is especially true for small businesses, with credit unions offering them some of the most competitive terms going. 

And by possessing several additional perks and benefits, it is certainly worth investigating credit unions - they may well offer the ideal funding product and lending terms your business sorely needs right now.

What is a Credit Union?

A credit union is much like a bank in that they both provide many of the same financial services. But unlike banks which operate for profit, credit unions are not-for-profit financial cooperatives that are owned by their members – that is, account holders that jointly own the credit union. As such, this means that rather than simply showing up and applying for a loan, you must gain membership at a credit union to receive funding.

Having non-profit status exempts credit unions from all taxes except for local real property and personal property taxes. In turn, this enables them to offer businesses some of the best interest rates on loans in the market.   

Should a profit end up being generated, however, the funds are typically reinvested back into the credit union and/or disbursed among the members as dividends (which are duly taxed at the membership level).

Types of Credit Union

There are two broad types of credit union as far as their regulation is concerned:

Federally Chartered Credit Unions: Such credit unions will include the word "federal" in their names, although they are not operated by the federal government. They are regulated by the National Credit Union Administration, which is backed by the US government, however.  

Federally chartered unions are also insured by the National Credit Union Share Insurance Fund (NCUSIF) which protects members up to $250,000. As such the NCUSIF performs a similar function to what the Federal Deposit Insurance Corporation (FDIC) performs for the banking industry.

Federally Insured State Chartered Credit Unions: these credit unions are regulated at state level rather than at federal level. As such, they adhere to their respective state’s regulations and guidelines, which mostly tend to be less stringent than the ones issued at federal level. The NCUSIF also insures these credit unions.

That said, states such as Arkansas, Delaware, South Dakota, Wyoming, and the District of Columbia do not have formal regulations for credit unions, which thus must be federally chartered instead.

Types of Credit Union Business Loans

You can find a diversity of business loan products at credit unions to help fund your business. Below are some of the most common of these products:

Business Term Loan – A standard business loan whereby you receive a lump sum cash amount up-front and you must repay the loan amount with interest, usually in fixed monthly installments. The interest charged by credit unions tends to be lower than that charged on comparable loans from banks. But the rate is still largely determined by your creditworthiness.

Loans at credit unions also tend to have more stringent conditions, such as higher borrowing thresholds (typically upwards of $10,000), and so are more suitable if you are intending to make large-scale purchases and/or investments with the borrowed funds. Terms can extend for several years, however, so you have enough time to pay off your loan with manageable monthly payments.

Another increasingly popular option are online credit unions which tend to offer shorter-term business loans and repayment required anywhere from 3 months to 24 months.  

Business Line of Credit – A revolving funding facility from which you can draw as much as you need up to a pre-agreed limit. You can repay partial amounts or the entire balance, and can borrow more within the credit limit, as you see appropriate, with interest charged only on the amount you have drawn.  

This flexibility can be useful for managing ongoing fluctuations in cash flow, as is invariably the case with seasonal businesses.

Equipment Loan – This loan is designed to provide you with the necessary funds to purchase, replace and/or upgrade equipment for your business, such as machinery, computers and photocopiers. The equipment itself serves as collateral for the loan, and will be seized by the credit union if you default on your loan repayment obligations.

For added security, some credit unions may also require a personal guarantee that you pledge to repay the balance of the loan, even if you are in default, and/or a down payment of up to 25% of the loan’s value to serve as additional collateral.

Vehicle Loan – this option is suitable if you are seeking to purchase new or used vehicles for your business, including vans, a fleet of trucks and company cars. Again, the vehicles themselves represent the security for the loan.

Commercial Real Estate Loan – this financing facility can help if you want to acquire new brick-and-mortar property, or renovate existing property, including office space, warehouses and factories. Not entirely dissimilar to mortgages, commercial real estate loans have comparable repayment terms, facilities typically secured by liens on the property.

Such loans can extend to as much as 30 years, with interest rates largely dependent on your credit history.

SBA Loan - Credit unions can help you secure a loan that is at least partially backed by government-sponsored loan guarantees via the US Small Business Administration. If the interest charged on your loan is of particular concern, this could be the optimal solution given that rates for SBA loans are some of the most competitive on the market. And when obtained through a credit union, the discount on rates vis-à-vis a typical business bank term loan can be significant.

The most popular SBA funding options are 7(a) loans, which can be issued when you want to raise working capital and expand your business in amounts up to $5 million, and 504 loans which are offered when you want specific purchases and build assets to expand your business and create jobs. Loan maturities for SBA loans extend to 30 years.

The major downside, however, is that SBA loans can take several weeks to approve, if not months. So, remember to consider the long waiting period you will likely have to endure before gaining access to your borrowed funds.

How to Obtain a Credit Union Business Loan

1.   Determine Your Financing Objectives – given the available types of business loans outlined above, you might be able to determine whether a credit union can serve your funding needs. If so, work out how much you can afford, how much you need to borrow and what objectives you intend to meet with the funds.  

Credit unions will have some minimum eligibility requirements before issuing any financing, so it is worth checking up-front that your business meets the following thresholds:

-      Time in Operation – Most credit unions will only lend to you if you have been in business for a minimum of 12 months.

-    Financial History – Generally a minimum annual revenue of $100,000 is required, but this can rise to $250,000.

-   Creditworthiness – Minimum requirements vary across different lenders, but a credit score of between 600 and 700 will be sufficient for most credit unions.

-      Collateral – Most loans offered by credit unions are secured facilities, such that you will have to post assets as collateral, including commercial property, equipment or a vehicle. As such, evaluate your capacity to pledge such assets.

2.   Research Terms On Offer – with loan terms varying considerably across different credit unions, it is worth spending time to verify the financing solutions on offer that most closely align with your needs. Some parameters to consider are:

                     i.            the loan amounts available

                   ii.            the terms for repayment

                 iii.            the interest rate charged

                 iv.            the collateral requirements

                   v.            any additional fees likely to be charged (such as origination and appraisal fees, as well as early-repayment fees)

3.   Research Credit Union Membership Eligibility - instead of customers, credit unions have members. As such, there are some key differences between joining a credit union and signing up for a banking service. Membership in a credit union has traditionally been restricted to those who shared a key trait in common.

For example, Military Credit Unions will offer membership and preferential loan terms if you are currently serving in the military or are a military veteran. Some even offer membership if a family member is or was in the military, or you work for other complementary organizations such as the Department of Defense.

Navy Federal Credit Union is the largest natural member credit union in the US in terms of both asset size and membership - $165.2 billion and 13 million, respectively, as of July 2023. You can qualify for membership and receive financial services through this union if you currently or previously served in the US Navy, Army, Marine Corps, Air Force, Space Force, Coast Guard, Department of Defense.

Other credit unions offer membership based on whether you:

-          Work in the manufacturing sector

-          Work in the service sector

-          Live, work or worship within certain communities

-          Are an employee or alumni of certain educational institutions

-          Have membership within specific organizations such as religious groups and social clubs

-          Are state and/or federal sector employee

That said, restrictions on membership for the general public continue to be eased by most credit unions, so it is worth researching the exact eligibility criteria for all relevant institutions.

4.   Obtain Membership – if you think you qualify for membership at your chosen credit union, complete the membership process – this typically involves filling out an application form, as well as possibly providing documentation as proof of your identity and/or proof of membership within a specific organization.

5.   Apply For Funding – Once you submit your loan application, it can take a week or longer to approve. But once the green light is given, and terms for pledging collateral are agreed, funds will normally show up in your account about 5 business days later.  

Pros of Credit Union for Business Financing

Lower Interest Rates and Fees – Compared with banks, credit unions tend to offer lower rates on comparable business loans, as well as other fees (such as origination fees, early repayment fees and charges on business accounts).

And while rates and fees do vary between lenders, it is highly likely that credit unions will offer you some of the best deals in the market. This can be crucial if you are operating on a tight budget.

Superior Customer Service – given their smaller size, their not-for-profit status and the closer commonalities among their members, credit unions are likely to offer you a more personalized service than that of a bank. This may even extend to being appointed a dedicated loan officer who can understand your business more deeply and thus provide more informed advice about which loan product is best for you.

This can be crucial if you are still not familiar with the business loan market, and it could ultimately mean that approval for your loan at a credit union is more easily granted than at a bank.

Appealing for Less Creditworthy Borrowers – if you are a smaller business, a start-up, or you have poor credit history, chances are that you are finding it difficult to obtain financing from banks and even online lenders. If so, you may have better fortune with credit unions.

With many having a distinct community focus, credit unions tend to have closer relationships with their members.

There are also over 500 credit unions in the country that are classed by the US Treasury Department as Community Development Financial Institutions (CDFIs), and work to empower low-income and underserved people and communities to enter the financial mainstream. Such lenders offer commercial loans for businesses in low-income areas, and as such, have more relaxed credit and financial eligibility requirements.

Cons of Credit Unions for Business Financing

Membership Required – credit unions are not open to everyone. You will have to apply to your chosen credit union and receive approval before proceeding with any request for funds. And while membership requirements are continuing to ease with every passing year, your chances of becoming a member may still be restricted by such factors as location, employment and membership in community associations.  

Not All Offer Business Funding Products – your search for the right credit union may be tougher than you imagine, especially seeing as not every credit union offers business financing services. And some of the ones that do offer them may not offer a particularly extensive range of loan products. Even if you qualify for membership, you may not find the loan product you are seeking.

Smaller Size – although their typically smaller size compared to banks provide credit unions with key benefits, such as offering a more tailored, personalized customer service, it also means that credit unions face their own challenges.

For one, credit unions are likely to have a narrower range of financing products from which you can choose. The loan amounts may also be smaller than those issued at banks, there are likely to be less physical branches, and they not be as digitally advanced which could end up delaying the application process vis-à-vis a more technologically advanced lender.