In the current tight credit environment, few small-business owners in need of funding can afford to leave this stone unturned. "Right now, there is no normal," says Therese Flaherty, director of the Wharton Small Business Development Center in Philadelphia. "Shopping around is even more important than it was last year."
Some small-business owners have found credit unions to be an attractive alternative to traditional lenders. Why?
Many credit unions are still actively lending to small companies. Many credit unions sidestepped the credit crunch, having largely avoided subprime mortgages and other risky lending practices that led so many of the bigger banks into trouble. Loan growth has actually risen at credit unions in 2009 while declining at commercial banks. Some credit unions are stepping in to fill the lending gap, aggressively courting small-business customers to pick up market share.
You may be able to get a better deal on a business loan. Credit unions often charge lower fees and interest rates than banks. While they lack the economies of scale of the megabanks, these not-for-profit, member-owned cooperatives are exempt from federal taxes and typically are more conservatively managed, so they often have lower costs to cover. Because they are not chasing profits, they don't have to charge as much as banks and don't have to pay taxes on the income they bring in.
You may have a better chance of getting a loan approved. For borrowers with good credit, underwriting standards at most credit unions hasn't changed. They can be more understanding than big banks if your credit is less than stellar and they may take the underlying circumstances into consideration. Even so, nowadays some credit unions are demanding more proof of income than they once did, such as tax forms and pay stubs.
Many credit unions are relative newcomers to small-business lending and didn't even begin participating in SBA lending programs until 2003. Look for credit unions to become even more aggressive in their marketing to small-business borrowers. They have been lobbying to raise their cap on business loans, which they view as unfair and arbitrary. They want it raised from its current level of 12.25% of assets to 20% or higher. (SBA loans don't count under the cap.) So what's the catch? OK, there is one.
You can't just walk into a credit union and apply for a loan. You have to join as a member. This means being part of the group around which the credit union is formed. This might be a specific geographic area, trade or profession. If a family member belongs to one, you may be able to join, too. And it's usually “once a member, always a member,” so keep your account if you change jobs or move.
There can be misconceptions about credit unions, so you should keep a few things in mind when looking into one. Don't be put off by any of the following:
The name. Some started out affiliated with a particular group, company or profession and have expanded beyond that niche to encompass a larger community or region.
The size. Smaller outfits often get a hand from larger industry players in the front- and back-office.
A local focus. Many credit unions share branches and ATM networks.
An outdated Web site. No frills often means lower costs.