A Bank or A Credit Union?
As a small business owner, you are probably well aware that the relationship with your company’s financial institution can have a major impact on your company’s success or failure. Therefore, selecting a financial institution for your company is one of the most important decisions you will make. You want to choose the right bank.
But is a bank actually the right choice for your company’s financial affairs? Would a credit union be a better choice? Many people view banks and credit unions as interchangeable. That’s understandable — banks and credit unions operate much the same way. However, there are important differences between the two. Each type of financial institution has pros and cons for consumers as well as for small business owners. The nature of your company’s products or services as well as its financial needs play a large role in choosing between the two types of financial institutions.
What Is a Credit Union?
Credit unions are nonprofit organizations designed to perform financial services and transactions for their members. Credit unions offer similar services as banks: checking and savings accounts, debit and credit cards, loans and investment instruments for both consumer and business customers. Credit unions also operate more than 30,000 ATMs nationwide. Like deposits in bank accounts, deposits in credit union accounts are insured by the Credit Union National Association (CUNA) up to $250,000. As of 2015, there were more than 6,900 credit unions across the country, holding more than $1 trillion in assets.
Unlike banks, credit unions distribute their earnings to their members – not to shareholders. Eligibility to join a credit union can be based on several factors: community residency, employment with particular companies or membership in particular organizations. However, because there are so many credit unions and such a wide variety of eligibility criteria, nearly everyone is eligible for at least one credit union. Two websites: mycreditunion.gov and asmarterchoice.org provide listings of credit unions and their eligibility requirements.
Advantages of Banks
There are two major advantages for business owners to do business with commercial banks rather than credit unions. First, commercial banks – at least the large ones – often reach far beyond the local community. By contrast, credit unions are by and large, locally based. As a result, if your company does business across state lines, it may be advantageous to work with a commercial bank. The second advantage with commercial banks versus credit unions is that commercial banks often have more physical branches than credit unions. If you prefer (or require) to conduct a significant proportion of your company’s business in person rather than on the phone or online, a commercial bank may be a better choice.
Advantages of Credit Unions
Credit unions often provide several advantages over commercial banks for small business owners. First, as nonprofit institutions, credit unions are not profit driven. As a result, credit unions frequently offer higher interest rates for savings accounts for both consumers and business customers along with lower interest rates for loans – and lower fees for services. This can translate into real savings – and a tangible boost to your company’s bottom line.
Especially since the onset of the Great Recession, many small business owners and entrepreneurs have found it difficult or impossible to obtain credit for working capital, inventory or equipment purchases or for expansion. As community oriented organizations, many credit unions are more customer oriented than large commercial banks. This often translates into more flexible lending standards for consumers and business customers alike.
Choosing Between Banks and Credit Unions
It should be evident that there is no one-size-fits-all solution to whether credit unions or banks are a better choice for small businesses. The final decision rests with each company’s owner after a careful consideration of the company’s status and its needs. But it just might be that the best bank for a company’s financial affairs might actually be a credit union.
Disclaimer: This article represents a general discussion of banks and credit unions. It is not intended to provide financial advice. Please consult with a financial advisor with specific questions about your company’s financial circumstances.
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