Credit Union Business Loans: 2023 Guide To Loan Types, Pros & Cons, & How To Qualify

For many business owners, a bank is the first stop when it’s time to take out a business loan. After all, with the ready availability of business bank accounts, credit cards, and loan options, a bank is a one-stop-shop for financial services.

However, more business owners are moving away from traditional banks and are turning to credit unions for their business financing needs. In fact, nearly 6,000 credit unions across the United States have over 100 million members. Offering many of the same services as traditional banks, credit unions are becoming the go-to resources for smart business owners.

Why should you consider applying for a credit union business loan? Read on to find out more about the benefits and drawbacks, how to apply, and the loans offered by these financial cooperatives.

What Are Credit Unions?

Before taking out a business loan from a credit union, it’s important to understand how credit unions work. Although they appear to work in similar ways as banks, there are big differences between the two. Unlike banks, which operate for profit, credit unions are nonprofit cooperatives.

Because the account holders at a credit union are also technically the owners, they are members, not customers. Any profit a credit union makes is reinvested or given as a dividend to its members. As nonprofit organizations, credit unions do not have to pay taxes, so they can offer extremely competitive interest rates to members.

Credit unions offer many of the same financial services as banks, including business and personal checking and savings accounts, vehicle loans, personal and business credit cards, mortgages, and business loans.

Types Of Credit Unions

There are several different types of credit unions to consider for small business loans. Those include:

• Federal Credit Unions: These credit unions are regulated by the National Credit Union Administration and are insured by the National Credit Union Share Insurance Fund (NCUSIF).
• Federally Insured State Credit Unions: The NCUSIF insures these credit unions.

Additionally, credit unions can also be categorized based on membership type. Credit unions fall into the following categories:

• Community Credit Unions: These credit unions serve members that live, work, or worship within a specific community.
• Educational Credit Unions: These institutions provide services to alumni and employees of specific schools.
• Military Credit Unions: Members of the military and veterans receive financial services through this type of credit union.
• Associational Credit Unions: Associational credit unions offer membership to members of an association, such as faith-based groups, social organizations, and fraternal organizations.
• Manufacturing Industry Credit Unions: These credit unions offer memberships to employees in the manufacturing industry.
• Service Industry Credit Unions: Membership is open to individuals who work in the service industry, such as the healthcare and finance industries.
• Government Credit Unions: These credit unions provide financial services to federal, state, and/or local government employees.
• Corporate Credit Unions: Corporate credit unions are larger institutions that provide financial services to other credit unions.
• Non-Federal Credit Unions: Also known as state-chartered credit unions, deposits at these institutions are covered by private insurers but not the federal government.
• Multiple Common Bond Credit Unions: These credit unions are chartered to serve multiple groups, such as two unrelated associations.

Types Of Business Loans Offered By Credit Unions

Like banks and other lenders, credit unions offer a variety of different loan options targeted at businesses. Since each credit union business loan comes with its own set of requirements, terms, and limitations, understanding the available financing options out there will be beneficial for business owners seeking a loan that fits their own unique needs.

Installment Loans

An installment loan is one of the most common types of loans, and most business owners have probably had experience with them in the past. With an installment loan, sometimes called a term loan, the credit union loans a specific lump sum of money. Regular payments, or installments, are made by the borrower on a scheduled basis, which is typically every month on the same day. This payment will be applied to the principal amount (the amount borrowed) as well as to interest charged by the credit union. Mortgages and car loans are just two examples of installment loans.

Rates and terms vary on installment loans. Smaller installment loans may be paid off within a few months, while larger loans may be paid over a lengthier term, such as 20 years or longer. Interest rates on these loans vary and are primarily determined by creditworthiness. Installment loans are available in various amounts, with some limits at credit unions reaching $50,000 or higher, depending on the institution’s lending policies. Installment loans are best used for larger purchases, such as long-term equipment, that will allow a business to purchase the asset without paying the full sum upfront.

For larger installment loans, collateral from the borrower is typically required. This could include business assets such as equipment or personal assets such as real estate. Collateral policies vary by lender.

Lines Of Credit

A business line of credit from a credit union is very similar to a credit card. With a line of credit, a borrower is given a credit limit. Multiple draws can be made on the account by the borrower up to and including this amount. This differs slightly from installment loans and other types of loans, which are distributed as one lump sum payment.

Lines of credit for businesses can be used in multiple ways, from covering emergency expenses to resolving cash flow issues during slow seasons. A line of credit can also be used to purchase supplies, inventory, or pay for other business expenses.

Interest rates for lines of credit are typically higher than for other financial products, such as installment loans, since they are considered a bigger risk. Interest will only be applied to the portion of the credit line that the borrower has used. Learn more about how lines of credit can give a financial boost to businesses.

The application process for a line of credit is usually much easier than the process for a term loan, and credit requirements may not be as strict. For many businesses, collateral for a line of credit is not required. However, borrowers with lower credit scores or that are otherwise seen as “high risk” by lenders may be required to pay a security deposit or put up assets or property as collateral to use the line of credit.

SBA Loans

Small business owners with a strong credit history and established businesses can turn to credit unions for Small Business Administration loans. These loans have become popular throughout the small business world for their low rates and extremely favorable terms. The SBA does not lend directly to business owners. Instead, intermediary lenders — such as credit unions — provide the loans. The government guarantees a large percentage of each loan (up to 85%), making it less risky for credit unions and other lenders to loan money to small businesses.

The application process for obtaining an SBA loan is notoriously long and difficult, but it’s not impossible. Small businesses that are lucky enough to get these loans will enjoy some of the most competitive interest rates on the market through a number of programs designed to help small businesses succeed. Since SBA loans are so competitive, businesses with strong business and personal credit histories have the best odds of approval.

There are several programs to choose from when applying for an SBA loan. This includes the standard 7(a) program, which provides up to $5 million for almost any business expense, as well as the 504 program that provides up to 40% of funding for commercial real estate improvements or purchases. Types of loans and requirements vary by each credit union. Learn more about the rates, terms, requirements, and how to apply for SBA loans.

Startup Loans

Business loans are difficult for any business to obtain, but new businesses and startups face a greater challenge. Most businesses are already viewed as risky by lenders, but a business without a history of solid financial documentation presents an even higher risk.

Whether you’ve been operating for just a few months or haven’t actually opened your doors yet, there are options available. Startup loans are available through credit unions. Some institutions have their own programs, while others offer SBA loans to qualified startups. You may also consider getting a personal loan through your credit union and use the money to fund startup projects and business expenses.

Because new businesses won’t have much of the documentation typically required by credit unions to receive a loan, other documentation will be required, which we’ll discuss a little later in this article.

Business Credit Cards

Many credit unions offer business credit cards to qualified business owners. A business credit card works just like a personal credit card but can be used by business owners and other named cardholders for business expenses.

Business credit cards come with a maximum credit limit. Borrowers can spend up to this limit at any location where major credit cards are accepted. Interest rates are applied against the balance of current charges, not against the entire line of credit. Monthly payments are used to pay off the balance, plus the interest. As the balance is paid down, the funds again become available for use by the borrower.

Credit card interest rates through credit unions are competitive with those of other lenders. However, rates may be higher for credit cards than you’ll see with other financing options (such as installment loans or traditional lines of credit).

Commercial Mortgages

Businesses that need a loan to purchase land or commercial real estate, add on to their existing building(s), or even refinance an existing commercial mortgage can often do so through a credit union. Many credit unions offer commercial mortgages that can be used to purchase real estate or fund improvements to expand a business.

These loans have competitive down payment requirements and interest rates. In addition to offering their own programs, credit unions may also offer 504 or 7(a) SBA loans that can be used toward commercial real estate. Rates, terms, and requirements vary by lender.

8 Credit Unions Open To The Public

While many credit unions have specific requirements that all potential members must meet to join, some credit unions are open to the public with minimal requirements. Joining these credit unions is as easy as giving a small donation to a charity or foundation. Some options to consider for credit union business loans include:

• Alliant Credit Union: You can join Alliant Credit Union by donating $5 to Foster Care to Success, a charity that provides support to teenagers aging out of the foster care system. This Chicago-based credit union allows you to apply for a variety of financial products online. You can also withdraw or deposit funds through one of Alliant’s over 80,000 surcharge-free ATMs located nationwide.
• American Heritage Credit Union: Forbes has named American Heritage Credit Union the top credit union in Pennsylvania. There are several ways to join American Heritage, such as paying a small, one-time donation to the Kids-N-Hope Foundation. American Heritage branches can be found throughout the state of Pennsylvania.
• Connexus Credit Union: One way you can join Connexus Credit Union is with a one-time $5 donation to the Connexus Association, which provides financial education resources and scholarships to business and education students. Connexus offers online services, over 5,600 shared branches, and over 54,000 ATMs throughout the nation.
• GTE Financial: If you don’t meet other membership requirements, you can join GTE Financial by paying a one-time $10 membership fee to CU Savers, the institution’s nonprofit educational financial club. While GTE is based in Florida, many of its services can be accessed nationwide through its website, shared branches, and fee-free ATMs.
• Hughes Federal Credit Union: You can become a member of Hughes Federal Credit Union with a one-time $10 donation to one of several community organizations, including Friends of the Oro Valley Library and Friends of the Pima County Library. This institution was formed in Tucson, Arizona, but has branches, shared branches, and surcharge-free ATMs nationwide to serve over 128,000 members.
• NASA Federal Credit Union: Most of us aren’t employed by NASA, but that doesn’t mean we can’t join the NASA Federal Credit Union. You can qualify for membership by becoming a member of the National Space Society. Upon sign up, you’ll receive a complimentary one-year membership to the NSS as well as access to financial products and services. This institution has branches, shared branches, and ATMs across the US.
• State Department Federal Credit Union: If you aren’t a Department of State employee, you may still be eligible to apply for an account through State Department Federal Credit Union. You may also apply for group membership, apply as an employee of an affiliated organization, or join the American Consumer Council. This institution has over 5,600 shared branches in all 50 states, as well as nearly 30,000 surcharge-free ATMs.
• Teachers Federal Credit Union: With over 320,000 members, Teachers Federal Credit Union is one of the nation’s largest credit unions. Anyone can become a member of TFCU. Membership costs just $1, and you’ll receive access to online banking services and a nationwide network of branches and ATMs.

Borrower Requirements For Credit Union Business Loans

Another way credit unions differ from banks is in how to join. With a bank, most people can simply supply personal information, deposit money into the account, and become a customer. Remember, though, account holders at credit unions are members, not customers. To become a member, you must meet certain membership requirements.

This sounds difficult, but it’s usually surprisingly easy to join a credit union. Consumers and business owners can be eligible to join a credit union through:

• Employers or industries
• Military affiliation
• Alumni associations
• Religious institutions
• Geographic location
• Family members
• Other group memberships, including labor unions and homeowners associations

When a suitable credit union has been found, an application must be filled out to open a checking and/or savings account. This application process is very similar to the process for opening a bank account. Once the application has been submitted and approved, a deposit is usually required to open the account.

After the applicant becomes a member of the credit union, they are then eligible to apply for additional financial services, including personal and business loans.

Credit Union Business Loans: Pros & Cons

The choice to take out a business loan should always be carefully weighed out by a business owner. You should consider the return on investment, or ROI, of the loan. In other words, will borrowing money help your business prosper in the long run, or will it drag the company into a cycle of debt?

Along with deciding how much to borrow, how the funds will be used, and what type of loan to pursue, smart business owners also need to decide what lender to work with. Credit unions are often at the top of the list, but before diving into the application process, businesses should have a full understanding of the pros and cons of getting a business loan from a credit union.

The Advantages

• Low-interest rates for qualified borrowers
• Excellent customer service
• Loans available to businesses with bad credit
• Loans available to startup businesses

One of the biggest benefits of getting a loan from a credit union is the very low-interest rates for qualified borrowers. Because credit unions are nonprofit organizations, they do not have to pay state and federal taxes. This allows these financial institutions to offer extremely competitive interest rates to their members, often beating out the rates offered by banks.

Another benefit is that credit union account holders are seen as members and not just as customers. Because of this, there’s usually better customer service, and the institution may be more flexible and willing to accommodate its members when it comes to lending policies. Working with a credit union to receive a loan can be easier for new businesses and businesses with bad credit.

The Drawbacks

• Limited lending services available
• Members may not be able to apply for a business loan right away
• Loans may not be available to very bad/limited credit borrowers

One of the biggest drawbacks of getting a loan from a credit union is actually finding one that offers the lending services that are needed. Credit unions are often very small and have limited business lending services. You may qualify for membership, but a credit union may not offer the loan you want, such as a commercial mortgage or SBA loan. Not all credit unions are the same, and each has its own lending programs and policies in place.

Another potential drawback is that some credit unions set certain requirements before a member can apply for a loan. This could include building up a savings account or being a member for a set period.

Working with a credit union may be easier than getting a loan from a bank, but some loans still have limitations. Borrowers with very low/limited credit or low revenues may encounter challenges when applying for credit union business loans. If this occurs, you can consider other options through the credit union or explore additional small business loan options from alternative lenders.

What Interest Rates Can I Expect From A Credit Union?

Like banks and other lenders, credit unions offer different interest rates to their members based on a number of factors, including but not limited to the type of loan, the loan amount, and the borrower’s creditworthiness.

In general, credit union members should expect to pay interest rates that are competitive with banks, and in many cases, even lower. For the most qualified, low-risk borrowers, interest rates below 5% are available for installment loans. For SBA loans, credit unions base their interest rates on the standards set by the SBA, which are extremely competitive.

Interest rates also vary by the type of loan selected. For instance, installment loans will almost always have lower rates than other types of financing, such as lines of credit or credit cards.

How To Apply For A Business Loan From A Credit Union

The application process varies from lender to lender, but some documentation is required by all lenders when applying for a business loan:

• Business licenses
• Articles of incorporation
• Profit and loss statements
• Personal and business financial statements
• Balance sheets
• Income tax returns

The business will also need to state how much money they are seeking and how the funds will be used.

The credit reports of the business and any owner of at least 20% of the company will be required to determine loan eligibility and interest rates.

Depending on the loan selected and the borrower’s credit history, collateral may be required. If the business is seeking a loan to purchase real estate or improve existing facilities, items including vendor and contractor quotes and purchase agreements may also need to be provided. For most loans, a personal guarantee by all owners with at least a 20% stake in the company is also required in lieu of or as well as collateral. This simply means that if the loan goes into default, the business owners will be held personally liable for the debt.

For new businesses and startups, some business documentation may not be available. For these businesses, a solid business plan will need to be submitted with the application. The borrower should also be prepared to prove that he or she has sufficient industry experience. Financial projections for at least one year may also be required.

After submitting all documentation and an application, the credit union will make an approval decision. If approved, the underwriting process will begin, and the loan will be funded. The length of the entire process depends on the type of loan selected. For example, a line of credit or credit card may be approved and used within days, while an installment loan, commercial mortgage, or SBA loan may take several weeks or months from start to finish.

FAQs About Business Loans From Credit Unions

Final Thoughts

In addition to offering checking and savings accounts for business owners, credit unions can provide affordable loan options for small business expenses. With personalized customer service and low-interest rates available to credit union members, any business owner seeking a competitive loan should consider a credit union business loan.