One of the very first things you need to do as a small business owner is open your bank account and maybe even get a loan. While you may be tempted to go with your personal bank, is it the right choice for your business?
When you are starting a small business, you want to find a financial institution that wants the best for you and your business. Whether it’s the support of your favorite member service representative or a low-interest loan, becoming a member of a credit union is almost always going to be better than being just one more account at a large bank.
Credit Union versus Bank
Even the way we talk about the way institutions handle our money – banking – is biased toward the largest and longest-running financial institutions. Chances are good that you’ve had an account with Wells Fargo or Bank of America during your lifetime. Let’s put it this way, both of the aforementioned banks have well over a trillion dollars in assets while the largest credit union in the United States, Navy Federal Credit Union has $112 billion dollars in assets. [source]
If, like me, you’re not great at huge numbers, that means the number one national credit union is roughly 6% the size of just the third largest bank, or roughly on par with CitiBank, the fourth largest bank in the U.S.
Just so we’re all on the same page, let’s establish a couple of terms before we get rolling.
What is a bank?
A bank is a for-profit financial institution that deals primarily in checking accounts, savings accounts, and a variety of loan types.
Banks, especially national banks, offer the widest range of products and services that you will find. They are also more likely to be widespread and have easily available branch access and ATMs.
The downside to that availability is that you are likely to be paying higher interest on a bank loan, but you will also probably get a lower dividend on your savings.
Like any other business, the goal of a bank is to make money for the owner – in this case, that means the shareholders. In the most basic terms, a bank makes its money by charging higher rates on its loans than it gives on savings deposits.
What is a credit union?
A credit union is a not-for-profit financial institution that deals primarily in checking accounts, savings accounts, and a variety of loan types.
Credit unions tend to be small so there will probably only be one (or a few) branches available to you, which could be a problem if you are likely to be traveling or plan to expand outside of the immediate area. To combat this issue, many credit unions are members of the CO-OP® Shared Branching and ATM networks. This means that you can visit a participating credit union and conduct basic business (deposits, withdrawals, etc, not loan applications or the like) just like you would at your own credit union.
Credit unions are owned equally by their members. That means that every account has a share (usually five or ten dollars) that is kept in the account to maintain membership and that gives each member an equal voice in the running of the credit union. Each year, the membership meets and votes on the board of directors and any other active business.
The money made by a credit union also goes to its owners, but in this case, that’s the membership. Instead of a fat-cat banker taking home a large check, the money is returned to the members through dividends on savings – this is why savings rates are higher at credit unions.
Non-profit or not-for-profit
You might have noticed that I referred to credit unions as “not-for-profit” earlier. That’s not exactly the same thing as being a “non-profit” organization.
Just like a nonprofit, not-for-profit organizations are not meant to make money for their owners. The distinction is that certified nonprofits are supported by tax-deductible donations and must provide a public good.
On the other hand, not-for-profit institutions, such as credit unions, do not directly earn money for their owners, and all money that is made is put back into the running of the organization.
Why is a credit union better for small businesses?
Although you should be sure of the needs of your business and the offerings of your local credit union, a credit union may very well be the best choice for your small business.
On the whole, credit unions tend to have better interest rates, both for savings and loans, than do their for-profit counterparts.
Full disclosure: I used to work pretty closely with a bunch of credit unions and I can provide some solid anecdata that credit union people are the best people. Visit your local credit union, make friends. You’re going to feel like a rock star and they’re genuinely going to care if your business succeeds.
Joining a credit union
I’m going to be honest. The biggest problem with joining a credit union is finding the right one. Because of the way credit unions are structured, membership is limited and you may not qualify to join your first choice.
For example, despite being the largest credit union, Navy Fed has relatively strict requirements for membership:
- Active Duty members, reservists, veterans, retirees and annuitants of the Army, Marine Corps, Navy, Air Force and Coast Guard,
- Army and Air National Guard personnel,
- Delayed Entry Program personnel,
- Department of Defense (DoD) civilians,
- U.S. government employees assigned to DoD installations,
- Contractors assigned to DoD installations, and
- Family members of one of the above. [source]
If you don’t meet one of the above requirements, you’re ineligible to join the credit union, and there’s really no way around it.
All credit unions have a unique charter that outlines the common bond that all members must share. In many cases, it will be a community charter, meaning anyone who lives in the area is eligible for membership.
Specific membership requirements vary by credit union, but will fall into at least one of these four categories:
- Employer – members of the credit union work for the same business;
- Community – members live, work, or worship in the same community, often a county or state;
- Membership – members are all involved in the same group (this can be an easy in as some credit unions are open to anyone who makes a donation to particular group or foundation); and
- Familial connection – you are almost always eligible to join a credit union if an immediate family member is already a member.
Finding the best credit union for my small business
When researching which credit union to join, you need to think beyond just find the closest branch to your home or business location.
While accessibility is important, you also must plan and determine what your immediate needs and ultimate goals are, and whether or not a specific credit union (or a credit union at all) is the right choice for you.
Finding a Credit Union by Location
Since credit unions have membership requirements, you can’t just walk into one and join the way you can at a
bank. However, your patience and research will be rewarded.
Start by searching Your Money Further‘s database of credit unions. Once you’ve searched by location or zip code, you can narrow your results to just the ones that offer business loans by clicking on the “Filter by: Credit Unions Services” dropdown menu.
Unfortunately, there is no way to search the database by membership eligibility and of the first five results, I am ineligible to join three. After several minutes of searching and reading through a truly dense membership page, I discovered I can join a group (for free with a code!) that will in turn make me eligible for membership. I still don’t know if I can join the fifth because you actually have to call the location to even find out and I’m a stereotypical millennial and that is 100% never going to happen.
Of course, you may also have luck simply googling “credit unions in my area,” but you would then need to wade through and find out if those results offer business loans.
Finding a credit union by need
Since not every credit union membership is bonded by location, you may have more luck starting by looking for credit union business accounts and then determining if you meet the eligibility requirements.
Here are a couple of credit unions that offer small business accounts and loans and have a fairly open membership (ie you just need to make a small donation to a supported charity or foundation to join):
*I have never used any of the above credit unions. This list isn’t a recommendation, just a jumping off point.
If you’re desperate
Look, I’m just about as passionate about the good that credit unions do as anyone else, but I’m also the first to admit that they can be difficult to figure out at first, especially since those well-meaning credit union folks are often the least tech savvy people you’ve ever met. (No offense if you’re one of the exceptions and you’re actually reading this!)
If you are really interested in talking to someone at a credit union, but you’re having trouble finding one, drop me a line. I can’t guarantee it’ll be a perfect fit, but I’ll find someone you can sit down with.