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A Bank Alternative: FAQs About Credit Unions

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A Bank Alternative: FAQs About Credit Unions

Published: November 18, 2009

Banks provide many critical business services - business checking accounts, loans, financial advisors - but credit unions are another provider to consider if you run a small business. If you haven't heard of credit unions beforehand or want to learn more about how you can leverage them in your business, this blog will give you a concise overview of what credit unions are all about.

What is a Credit Union?

A credit union is a non-profit financial institution that is organized and operated by its members. Members merge their resources in order to provide loans and other services for other membership within the credit union. Many credit unions are federally insured by the National Credit Union Administration (NCUA), but there are others - fewer than 500 - that are not.

A unique characteristic of credit unions is that they are run by members and serve members only. A person must be a member in order to receive and benefit from a credit union's services. On the other hand, banks are privately-owned, for-profit institutions that serve customers. In other words, customers are not involved in the day-to-day operations nor do they effect the goals and objectives of the bank.

Why Would I Become a Member of a Credit Union?
The benefits of being a member of a credit union stem from the nature and structure of credit unions. Since members run the board, members are both the customer and the service provider at the same time. Therefore, members have greater influence over how the credit union is run, as well as have greater decision-making power within that credit union. Conversely, you, as a customer would have no say or influence over the operations of a bank.

Since it is member-run, a credit union will also focus on services and savings for their own members. This objective generally leads to lower interest on loans and credit cards, lower cost services, and higher interest rates on savings compared to those of banks. Furthermore, credit unions are tax-exempt because they are non-profit organizations.

When Would I Rather Go to a Bank?
As credit unions are community-based, they offer limited services and are less accessible. You can find several banks in just about any country and city in the world, but your credit union probably offers services in much more limited locations. Furthermore, credit unions may charge more for extra services like ATM transactions because they do not have the same leverage that bigger banks do.

For more information on banks, see our article on Selecting the Right Bank for Your Business.

Assessing Your Needs
Banks and credit unions both offer benefits to their customers. Thorough research and honest assessment of your business's needs will help you decide which service is the best fit for your business.

Resources
National Credit Union Administration
Selecting the Right Bank for Your Business

Message Edited by ChristineL on 11-18-2009 04:02 PM

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Comments:

For the start up company, opening a checking account with a credit union instead of a regular bank holds many advantages. Credit unions are also better for the business looking for a second chance banking program.
bpicciri - thanks for your informative comment. Selecting a bank or credit union affects is a decision that is very much dependent on the businesses' unique circumstances and financial footing.
I find this article to be quite accurate except it lacks emphasis.  A credit union is often the best choice for the consumer if you can manage their rules and regulations.  Credit unions generally are harder to borrow from, their rules are more stringent and inflexible.  Bank are as well to an extent, but they will find way to accomodate or compensate for their customer.  I'll give a classic example.  A prospective borrow comes in to purchase a new home.  They go to a credit union, they have 5% of the loan. More than likely they will be denied due to risk of default (people with 20% down payments are considered less risky).  Same situation but with a bank.  The borrower now makes two loans, one for 80% and one for 15%(soft loan).  Both are for the same amount but the bank was willing to structure it so it meets guidelines.  The CU will most likely not offer the 15% soft loan at all.  Banks are their for profit which means they go out of their way to make it happen.  A CU is for its members, if its not for the members its not for you.   

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