On average, small businesses create 67 percent of new jobs in America. They employ half of the nation’s workers and are one of the keys to a strong economy.
The key to keeping a small business thriving, in turn, is reliable, low-cost financial services. For many small businesses, banks simply don’t provide the terms and personalized service they need. But are credit unions really a viable alternative?
Here are the pros and cons of credit unions that every business owner needs to know about.
What Is a Credit Union?
Before exploring their pros and cons, it’s important to understand what credit unions are and how they differ from traditional banks. Like banks, credit unions are:
- Financial institutions that offer standard services such as checking and savings accounts and financing
- Generally equipped with the latest in technology, such as online banking platforms
- Safe and legal
Unlike banks, credit unions are:
- Not-for-profit organizations
- Open only to qualifying parties
- Typically smaller and more regional in footprint
- More customer-focused
- More likely to offer good interest rates, low fees, and flexible terms
Most of these differences stem from the fact that, as for-profit companies, banks are beholden to their stakeholders. They structure terms and make decisions with the goal of generating profit. This often results in less-than-favorable terms for the individuals banking with them.
In a credit union, the members or customers doing business with them are the chief stakeholders. Credit unions’ not-for-profit status allows them to offer better terms and any profit made is reinvested in the businesses or returned as dividends to account holders.
Pros of Credit Unions
Credit unions are great for small businesses. Here are the top reasons why.
They Save You Money
Credit unions routinely charge lower fees than banks. Often, there are no charges at all for establishing or holding accounts. ATM fees tend to be low and may be reimbursed up to a certain amount each year.
This can save businesses large sums of money.
They Make You Money
Credit unions tend to offer better interest rates than banks. When they make a profit, they return it to members in the form of dividends. Both of these things put money in your pocket.
If that wasn’t enough, the money you save due to their great terms gives you cash to reinvest in your business. This fuels your business growth, bringing in even more money.
Great Customer Service
Credit unions are much more embedded and invested in their communities than banks. With this local focus, they can offer superior flexibility and customer service. Often, this translates into very high rates of customer satisfaction.
Having that kind of control and support in your own finances can also help you offer your clients the best possible customer experience.
You Have Control
As a member of your credit union, you have a voice in its operations. You gain a vote on policies and procedural issues, and a say in how operations are conducted. This gives you the opportunity to ensure that your benefits remain intact and a chance to push for the adoption of more policies in your interest.
In addition to these essential benefits, business owners also enjoy:
- Knowing that their money is safe and insured
- Access to unparalleled business loan terms
- Supporting other local businesses in their communities
- Access to additional business support services such as financial advising offered by most credit unions
Cons of Credit Unions
When exploring the pros and cons of credit unions vs banks, business owners will find that credit unions have very few cons. How much these cons impact an individual business varies. Here’s a look at the top three.
For some businesses, the fact that credit unions are very localized is a problem rather than a benefit. Credit unions may not be the best choice for you if your business involves operations in multiple, very disparate locations or you do a large volume of international business. In those cases, you would need to select a large online credit union to handle your needs rather than a local one.
Membership Is Required and May Be Limited
As a general rule, anyone can open an account with any bank. Most credit unions, by contrast, place limits on who can become a member. No one who is not a member can open an account.
Often, becoming a member is as simple as:
- Proving that you live or work in the community
- Making a small donation (such as $5) to become a member
- Producing documentation that you meet some other criteria for membership such as age or institutional affiliation
While this can take only seconds to do, it may be an unwelcome extra step for some small business owners.
They May Offer Fewer Start-up Funding Loans
While credit unions can be an ideal place to get loans for your existing business, they may have fewer options to offer entrepreneurs seeking seed funding. The terms on the options they do have tend to be excellent, but the range of options is likely to be smaller.
Choosing What Is Best for Your Business
How can you choose the best credit union or bank for your small business? Although handling finances can be stressful, choosing between banks and credit unions doesn’t have to be. Here are a few simple steps to finding the right option for you.
First, look at the credit unions in your area and find out what their membership requirements are. You may be surprised to find that you already qualify.
Second, compare the interest rates and fees on the financial products you are currently using or are interested in at your bank and at the local credit union. This will give you a clear idea of how much you might save by switching.
Finally, explore the business services and supports your local credit union has to offer. They may be the key to your business growth.
Pros and Cons of Credit Unions
Once you’ve compared the pros and cons of credit unions, you may find that switching to a credit union opens up new opportunities for business growth. Check out other smart financial moves in our finance section today.