Credit unions are growing in popularity because of their competitive interest rates and excellent customer service. Before you apply, here's everything you need to know about credit union business loans.
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Offering many of the same services as traditional banks, credit unions are becoming the go-to resources for business owners. Some of the best small business loans can be found at credit unions. But is a credit union business loan right for you?
In this post, we’re going to break down credit union business loans. From how to become a member to applying for funding, this guide covers it all. Keep reading to find out if a loan from a credit union is a smart financial choice for your business.
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
Installment loans (also called term loans) provide borrowers with a specific lump sum of money. Installment loans are best for larger purchases, such as long-term equipment, allowing businesses to purchase assets without paying the full amount upfront.
Installment loans from credit unions typically have high borrowing limits of $50,000 or higher, depending on the institution’s lending policies.
Regular payments are made by the borrower on a scheduled basis, which is typically every month on the same day. This payment is applied to the principal amount (the amount borrowed) and the interest charged by the credit union. Interest rates on these loans vary and are primarily determined by creditworthiness. Smaller installment loans may be paid off within a few months, while larger loans may be paid over several years.
For larger installment loans, collateral from the borrower is typically required, although policies vary by lender. Collateral may include business assets and/or personal assets.
Lines Of Credit
A business line of credit from a credit union is very similar to a credit card. A line of credit is a flexible form of funding that can be used for any business expense, including working capital, inventory, supplies, or emergencies.
A credit union assigns a credit limit to the line of credit. Multiple draws can be made on the line of credit provided it doesn’t exceed this credit limit.
Since lines of credit are considered a bigger risk, interest rates may be higher than other financial products. Interest is only applied to the portion of the credit line that the borrower has used.
The application process for a line of credit is typically easy. Credit requirements are often not as strict as with installment loans. In most cases, collateral is not required. However, borrowers with bad credit and other high-risk borrowers may be required to pay a security deposit or put up collateral before accessing the line of credit.
SBA Loans
Credit unions also provide Small Business Administration loans. These loans are backed by the SBA, taking the risk off of lenders like credit unions. For business owners, this means easier access to long-term loans with low interest rates.
The SBA loan application process is long and difficult, but businesses with strong credit histories and solid revenue will be rewarded with some of the most competitive rates in the lending industry.
There are several SBA loan programs available, including:
- SBA 7(a) Loans: This program provides up to $5 million for almost any business expense.
- SBA CDC/504 Loans: Under this program, a borrower works with a Certified Development Company (CDC) and a private lender (such as a credit union) to fund commercial real estate improvements or purchases.
The types of loans available and borrowing requirements vary by credit union.
Startup Loans
New businesses and startups are viewed as risky borrowers, often making it difficult to find funding.
Fortunately, startup loans are available through some credit unions. Some credit unions have their own loan programs, while others provide SBA loans to qualified startups. Another option is to get a personal loan for business expenses through a credit union.
Because startups and new businesses won’t have the typical documentation required for a business loan, additional requirements may need to be met to receive a loan.
Business Credit Cards
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
Many credit unions offer commercial mortgages that can be used to purchase commercial 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.
The Pros & Cons Of Credit Union Business Loans
Pros
- Low interest rates for qualified borrowers
- Excellent customer service
- Loans available to businesses with less-than-perfect credit
- Startup loans available
- Loan options for nonprofits
Cons
- Limited lending services available
- Members may not be apply to apply for a business loan right away
- Loans may not be available to very bad/limited credit borrowers
Before choosing a credit union for your small business funding needs, make sure to weigh out the pros and cons.
The Advantages Of Credit Union Business Loans
Here’s why you should consider using a credit union for your business funding.
Low Interest Rates
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.
Excellent Customer Service
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.
Loans For Startups
Because credit unions have more flexibility and closer relationships with their customers, it may be easier for new businesses, startups, and business owners with lower credit scores to qualify for funding opportunities.
The Disadvantages Of Credit Union Business Loans
While there are many benefits to borrowing from a credit union, there are a few potential drawbacks worth noting.
Limited Lending Services
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.
Borrower Requirements
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. This could be an issue for businesses that need funding fast.
Limited Options For Bad-Credit Borrowers
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.
How To Join A Credit Union
Credit union account holders are members — not customers — so joining one of these institutions looks a little different than signing up for a bank account.
To become a member, you must meet certain membership requirements. 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
If you don’t meet these requirements, some credit unions allow members to join through other means, like making a small one-time donation to charity.
Once you’ve identified the credit union you want to join, you’ll fill out an application to open a checking and/or savings account. This process is similar to opening a traditional bank account. Upon approval of your application, you’ll be required to make a deposit to open the account.
After you’ve successfully joined the credit union, you are now eligible to apply for additional financial services, including personal and business loans.
8 Credit Unions That Anyone Can Join
Many credit unions have business loans. But some of these institutions have very specific requirements that must be met in order to join.
These eight options are open to the public and have minimal membership requirements.
Alliant Credit Union
If you don’t meet other membership requirements, you can become a member of Alliant Credit Union by donating to Foster Care to Success. This charity provides support to teenagers aging out of the foster care system.
The Chicago-based Alliant Credit Union offers 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
There are several ways to join the Pennsylvania-based American Heritage Credit Union. If you don’t meet other requirements, you can make a small donation to the Kids-N-Hope Foundation, a charity that funds the Music Therapy Program at the Children’s Hospital of Philadelphia.
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 5,000 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 its members.
NASA Federal Credit Union
You can qualify for membership with NASA Federal Credit Union by becoming a member of the National Space Society. Upon signing 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.
After joining, you’ll receive access to online banking services and a nationwide network of branches and ATMs.
Borrower Requirements For Credit Union Business Loans
Borrower requirements for credit union business loans vary based on the lender’s policies, the borrowing amount, and the type of loan you’re applying for.
In general, borrowers should have a business that has been in operation for at least two years, steady revenue, a good to excellent personal credit score, and a solid credit history.
Options may be available for newer businesses, seasonal businesses, and borrowers with credit challenges. However, it’s worth noting that the lowest rates and best payment terms are reserved for borrowers deemed as the lowest risk.
Depending on the loan selected and the borrower’s credit history, collateral may be required to secure the loan.
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. The most qualified, low-risk borrowers will receive the lowest rates. 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
While the application process and requirements vary by lender, here’s a general overview of what to expect when applying for a business loan through a credit union.
Step 1: Determine If You Qualify For A Credit Union Business Loan
The first step to applying for a business loan from a credit union is to determine if you qualify. Before you do this, you’ll need to make decisions on:
- Borrowing amount
- How the loan will be used
- Loan type
Once you’ve narrowed down your options, do your research to find out borrowing requirements. You can do this by going to a local branch or visiting your credit union website.
You’ll also need to gather documentation to prove you meet all requirements (more on this later) and check your credit score and credit report. If you don’t meet credit requirements, consider another type of loan, browse other lenders, or take steps to improve your credit.
Step 2: Fill Out A Loan Application
After selecting your loan and determining that you may qualify, the next step is to fill out a loan application. You may have to visit a credit union branch, but many institutions now offer online applications.
Applications vary by lender, but generally, you’ll need to provide:
- Personal contact information
- Social Security Number
- EIN
- Business contact information
- Revenue
- Time in business
- Borrowing amount
- Loan purpose
Step 3: Provide Documentation To The Lender
You may be required to provide documentation to your lender based on the type of loan, borrowing amount, and other factors. These requirements vary, but here are common documentation requirements:
- Business licenses
- Articles of incorporation
- Profit and loss statements
- Personal and business financial statements
- Balance sheets
- Income tax returns
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.
If the business is seeking a loan to purchase real estate or improve existing facilities, items like vendor and contractor quotes and purchase agreements may also need to be provided.
New businesses and startups may not have all the required documentation. If this is the case, credit unions may require:
- A solid business plan
- Proof of industry experience
- Financial projections for at least 12 months
Step 4: Sign A Personal Guarantee And/Or Provide Collateral
For most loans, a personal guarantee by all owners with at least a 20% stake in the company is required. This simply means that if the loan goes into default, the business owners will be held personally liable for the debt.
Collateral may be required instead of or in addition to a personal guarantee. Collateral is usually in the form of business assets, but in some cases, personal assets may be used as well.
Once you have everything together, you can submit your application to the lender.
Step 5: Follow Up With Your Lender
After submitting your application and documentation, it’s important to follow up with your lender. During the approval process, you may need to provide additional information or documentation or answer questions posed by the lender.
Make sure that you follow up promptly on all emails and phone calls to prevent delays in receiving your funds.
Step 6: Wait For Loan Approval
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
What credit unions offer business loans?
Many credit unions offer business loans and services including merchant accounts and payroll. Alliant Credit Union, NASA Federal Credit Union, and others listed in this guide provide business funding options for its members.
What interest rates do credit unions charge for business loans?
Business loan interest rates vary by numerous factors including the type of loan, borrowing amount, and borrower’s credit score. Generally, you should expect to find rates similar to bank loans, and in some cases, rates that are even lower.
Do credit unions help build your credit?
Some credit unions will help build credit. If you’re not sure, ask the credit union that you are working with whether they report to the credit bureaus.
The Bottom Line On Credit Union Business Loans
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.
