Credit Union Business Loans: Everything You Need to Know
When you’re shopping for a small business loan, you know you should compare rates and loan terms amongst lenders. You’ve probably browsed options from big banks and looked up some tips from the Small Business Administration (SBA).
What you may not have thought of is looking at credit unions for your business’s financing needs. But it’s undoubtedly an option you should consider.
Why choose a credit union for business financing?
Credit unions are organized differently than banks. Rather than having shareholders with deep pockets who invest in the financial institution, each customer or “member” is contributing toward the credit union’s financial health simply by virtue of having an account. Then, instead of paying shareholders a return on their investment as many banks do, credit unions are able to pass their profits on by offering lower rates to their members on lending products and higher rates on their deposit accounts.
Pros and cons
Besides competitive rates, there are several other pros to using a credit union:
- No early payoff penalties at federal credit unions.
- Smaller loan amounts available.
- Credit unions are invested in their communities, and are therefore more likely to do everything within their power to help you make your small business loan “work.”
- Customer service is typically a priority for these organizations, making your working relationship easy and amicable in most situations.
However, you may hit a few bumps in the road when using a credit union. Here are some of the cons:
- You and/or your organization must meet eligibility requirements in order to join the credit union.
- Federal credit unions cannot issue a business loan with a term of more than 15 years, which may lead to higher monthly payments, though this fact is also likely to save you money in interest of the course of your loan when compared to loans with longer terms.
- Just because credit unions typically offer favorable interest rates and terms does not guarantee they’re offering the best product on the market. You’ll want to be sure to do some comparison shopping before blindly committing.
What to watch out for
If you are taking out a larger loan, you will want to be sure you understand the repayment details for not just a few months down the road, but through the course of your loan’s entire term. Brandi Bruyere, vice president of regulatory compliance at the National Association of Federally-Insured Credit Unions (NAFCU) said that because federal credit unions are limited to maturity terms of 15 years or less as discussed above, payments can sometimes be unrealistic for small business owners to afford upfront. Credit unions have a workaround for this, though.
“I don’t know that it’s terribly common, but on these loans you may have something called an escalating payment structure,” she said. “Your loan still has a fixed rate, but the amount of principal you pay on the front end will be smaller.”
This means your payments will be lower at the beginning of your loan as you’re building your business. Then, hopefully as your profit margin grows, your payments will go up as you start paying more toward the principal. Sometimes that manifests as a balloon payment at the end of your loan, but sometimes your payments get progressively larger as time goes on.
While you’re taking advantage of credit unions’ competitive rates and flexibility, be sure to ask if your payments will stay static throughout the course of your entire loan or if your monthly payments will get larger as time goes on. An escalating payment structure may be advantageous depending on how long you’ve been in business or the purpose of your loan, but you should be aware of how it works so you’re not caught off guard by the higher payments further down the road.
Who can apply for credit union business loans?
Each credit union has its own criteria for membership. Some may require that your business is located in a certain geographic area. Others may require that the business’ owners all be members of a particular organization in order to qualify for membership and therefore a loan.
If you do not meet a credit union’s membership requirements, but you’d still like to do business with them, Bruyere does have a workaround.
“One thing we’ll see is a credit union amending its charter,” she said. “Then, they’ll add the business to its field of membership.”
She says this not only allows you to take out a business loan, but it also serves as a new employee benefit you can advertise. As long as someone is an employee of your business, the charter can be revised to have them qualify for membership regardless of any geographic residency requirements the credit union may have.
Typical requirements for credit union business loans
Many business loans offered by credit unions are backed by the SBA. The SBA requires a minimum credit score of 680. However, because credit unions are so flexible, Bruyere notes that you don’t necessarily have to get a loan that is SBA-backed. One common thing you’ll see is credit unions accepting collateral instead of running your credit report.
“Previously, business loans had to have a personal guarantee,” she said. “But for a lot of folks operating an LLC, they don’t want to put a personal guarantee on a loan. Today personal guarantees are more common than not, but now credit unions have the freedom to look at collateral quality instead.”
The required revenue to qualify for a business loan with a credit union will vary based on how much you want to borrow. Bruyere says that while your debt-to-worth ratio will be considered, there is no hard and fast universal minimum across credit unions. Instead, the entire financial picture—including collateral, number of years you’ve been in business and your overall ability to service the debt—will be considered holistically.
The application process
Before you apply for a business loan, it’s good idea to have the following documentation ready to go:
- Credit risk assessment
- Balance sheets
- Income statements
- Most recent financial audit (if your company is large enough to have one)
- Tax returns for the past two years
- Information regarding any collateral you may be putting up
Your specific credit union may not initially require every last piece of documentation listed, but Bruyere says that having it at the ready can help speed up the application process. After you fill out the initial application, you may even be asked for documentation not found in this list as every business and loan comes with its own unique set of circumstances.
Credit union vs. big bank financing
Besides competitive rates and flexible loan amounts, Bruyere points to customer service as a highlight of working with a credit union over a big bank.
“Credit unions provide a personal touch with how they work with members,” she said. “They’re in the community they serve, so they have a vested interest in seeing community businesses succeed. You may benefit from that fact as your loan officer will want to provide guidance and support.”
Because credit unions are so community-centric, Bruyere said banking with one can be a feel-good experience, as you’re not only getting benefits like competitive rates and flexible loan terms, but you’ll also be keeping your money in your community.
The bottom line
Credit unions can be a great option when you’re looking for a business loan with competitive rates, flexible loan terms and a reputation for great customer service experiences. As with any other financial transaction, though, you’ll want to shop around to ensure you’re getting the most favorable terms and rates. And—particularly when you’re banking with a federal credit union—be sure to understand your repayment schedule from day one through the entire course of your loan, as escalating payments may be worked into your loan structure.