Credit Unions vs. Banks: What’s a Better Business Loan?

Posted at 08:00h in Small Business Financing by Pretha Yasmin

The decision to take a small business loan from a credit union or a bank is going to come down to what matters to you as a borrower, your willingness to join a members-only organization, and which institution approves your application based on your risk level. There’s advantages and disadvantages to taking loans from both, including interest rates, access to online portals, and the quality of customer service. Before we jump into those factors, let’s explore how the two types of financial institutions are managed and operated.

Credit unions are owned by their members and managed by a board of directors, while banks are managed by an executive team that reports to a board of directors, stakeholders, and stockholders. Although both credit unions and banks follow strict government regulations, credit unions are member-focused, while banks are profit-focused.

A credit union is dedicated to serving its members because it is owned by its members, making profit a secondary objective as opposed to the primary goal. As such, credit unions may provide lower rates. Meanwhile, banks are for-profit organizations, so they may offer higher interest rates. But don’t count banks out just because credit unions may have better interest rates.

Higher profits give banks the ability to invest in technology, leading to more accessibility and often quicker approval processes by comparison. You may also be able to do more with this technology (i.e., using an app to track and simplify your finances), whereas many credit unions may not be able to invest in (and offer) these resources.

Still stuck in choosing between a bank or a credit union for taking a small business loan? Don’t stress. The guide below shares multiple situations where these two types of loans have distinct advantages to help make your decision easy.

But please note the information will change depending on the credit union you belong to/the bank you apply with, how much collateral you can put down, and your specific loan needs.

	Credit Union	Banks (Large and Alternative)
Interest rates	Low	High
Flexibility of loan options	Less	More
Organization goal	Non-profit	For-profit
Government-regulated	Yes	Yes
Restrictions on SBA loans	More (regulated by the NCUA and SBA)	Less
Requires membership	Yes	No
Larger loans available	Not likely	Yes
Loans grow with your business	No	Yes
Access to local branches	Not always	Most likely

As you can see from the table above, there’s positives and negatives no matter which way you go. In some ways, these two types of lenders are equal. Here are situations where one is better than the other, and when they’re roughly the same.

Choosing Credit Unions Over Banks for Business Loans

Pros of Credit Unions:

Owned by members
Tend to have more personalized service
Lower interest rates

Supporting the community and focusing on fellow members can be an incentive to be more patient and provide extra care, as both parties are members. But having profit as a goal with a bank isn’t always a bad thing, which you’ll learn more about in the next section where we cover scenarios for choosing banks over credit unions.

As mentioned before, because credit unions are member-owned and only members can take business loans, their interest rates may be lower than the interest rate on a loan from a bank. But with less interest being paid, there’s less capital available to lend, so you may not be able to get larger loans, potentially limiting your growth.

If you’re just starting out and money is tight, credit unions may have lower fees than banks, saving you a bit when applying. Once you’re a member of the credit union, the deposits on your business loans may be lower than the deposits required by large banks, as the goal isn’t making higher profits. But this doesn’t always hold true.

When it comes to SBA loan deposits, both credit unions and banks require about the same. This is because some of the lending requirements are controlled by the SBA vs. a private loan where the organization itself funds the entire amount and can thus control the requirements.

And credit unions can be a great choice over a large bank when it comes to disaster and emergency business loans, as they may be able to act faster without the red tape typical of large banks. This gets you the money promptly to boost working capital, replace inventory, or keep operations running. This is similar to using an alternative lender or a smaller bank where requirements are not as rigid and decisions can be made faster.

Choosing Banks Over Credit Unions for Business Loans

The pros of banks and some alternative lenders:

More technology including online accounts and being able to transfer funds
Access to more locations and ATMs
The ability to increase business loan size as your company and needs grow

When your business has the opportunity to grow and you decide to take it, banks are better for expansion financing than credit unions because they have more assets and can provide larger loan amounts. This makes business acquisition loans easier to get with a bank than a credit union. Similarly, manufacturing and inventory loans, which you can use to scale your operations quickly as you land large new customers, are more likely to be available through banks.

As mentioned, banks have more money to reinvest in their operations, so they can invest in technology to create online customer portals and other conveniences. They’re more likely to have more physical locations, so customers have easy in-person access and can avoid the fees of using third-party ATMs, which they may incur with credit unions. The variety of loan options to meet your specific needs is greater with banks over credit unions, as well. This includes SBA loans, which credit unions must meet additional requirements to provide.

While both banks and credit unions are regulated by the government, credit unions are also regulated by the National Credit Union Association (NCUA). This organization provides legal opinions and additional restrictions on how SBA loans can be provided to members. Whereas banks still have to follow SBA guidelines, they do not respond or report to the NCUA, allowing for more flexibility.

You may have a higher interest rate with a bank, but if you use ATMs regularly, want to be able to make monthly payments online, and enjoy being able to easily transfer funds to suppliers, contractors, and vendors, you’ll likely prefer working with a bank vs. using a credit union. Banks may also have better options than credit unions for paying back your loan faster without penalties, especially if the business loans are under specific time frames.

When Credit Unions and Banks Both Make Sense for Business Loans

Both credit unions and banks have to comply with the SBA 7(a) prepayment prohibition penalty if the term of the loan is over 15 years. This penalty applies if the prepayment is more than 25% of the balance of the loan and within the first three years after the date of the first disbursement. You can learn more about this on the SBA website here.

Credit unions and banks also offer adjustable rate and fixed-rate business loans, so it’ll come down to the length, amount, and speed to get the financing vs. worrying about the rate being locked in or changing over the course of the loan when choosing one over the other.

When your business needs larger amounts of funding, or you want your lender to be able to grow the financing available as your business grows, banks are better than credit unions. If the feeling of community through member-owned non-profits appeals to you more than having technology and plenty of local branches, credit unions can be a better choice than a large bank. And if you want the best of both worlds, alternative lenders like us can help with all your small business financing needs. Apply today in just a few minutes to explore your customized funding options with no cost or commitment.