In today’s economic climate, some entrepreneurs will take a business loan from just about any lender. They don’t know whether there are differences between banks and credit unions. They just know that they need a loan. There actually are several differences between borrowing from a bank and a credit union. Knowing more about those differences could help you save time and energy by choosing an option that works best for you.
Small Business Loans From Banks and Credit Unions
If you own a small business, then you will probably have better luck asking a credit union for a loan. Credit unions tend to take chances on small businesses in their communities. Typically, though, you can’t borrow a huge amount of money. Currently, credit unions can only lend 12.25 percent of their total assets (there has been talk in Congress of moving the cap to 27.5 percent). That means they can’t let one member borrow a huge sum of money; this would make it impossible for them to lend to other members.
Banks are less likely to accept a loan application, but they are your best option when you need a really big business loan. Banks are for-profit companies, so they can basically do what they want to earn profits. Obviously there are some regulations, but the average borrower will never experience them. If you need to a borrow $2 million for your building, head to the banks. While chances may be slim that you will secure that amount of capital, at least you’ll be asking the right people.
Loan Differences Between Banks and Credit Unions
Credit unions are non-profit organizations that are owned by the people who use them. If you’re a member, then technically, you own a part of the credit union. Some small businesses find they get better interest rates from credit unions because they aren’t trying to earn a huge profit. You might also find that credit unions offer better interest rates on savings and checking accounts.
Note, however, that this isn’t always true. The average credit union can offer better interest rates than the average bank, but not all credit unions are the same. Some will charge much higher rates than others. It’s important to compare rates from credit unions and banks before you decide which option works well for you.
Members, Customers, and Qualifications
Just about anyone can walk into a bank, open an account, and become a client. Banks are happy to accept anyone who can show the most basic levels of responsibility. Credit unions operate a little differently. To use their services (that includes borrowing their money), you have to be a member.
Qualification differs from credit union to credit union. Some credit unions will accept anyone within a city, county, or state. Others only accept people who work for certain companies. It’s smart to learn about these qualifications before you start applying for business loans. You could find out that you’ve wasted a lot of time filling out paperwork for an organization that won’t do business with you.
[Photo Credit: CNN Money]