Through the end of 2009, the nation’s 7,710 credit unions had some 91 million members. But with $897 billion in combined assets, the entire credit union industry (www.ncua.gov) pales in comparison to even a few of the big bank balance sheets. But, America’s life-blood is its entrepreneurs and small businesses. Is a credit union a good choice for the many small businesses in our country?
Credit unions are very different from banks first in their ownership. A credit union is a mutually-owned cooperative. That means that credit unions are owned by their depositors, or members in credit union language. A deposit in a credit union is known as a share and where bank’s pay their profits in the form of dividends to their own shareholders, credit unions are not-for-profit and return to their own shareholders the benefits of ownership in the form of higher rates paid on deposits (shares) and lower borrowing rates.
Lest you jump on that higher rates/lower rates benefit too quickly, you first must “qualify” for membership. Credit unions operate based on a field of membership – or a common bond. Credit unions got their start in Europe through the trade unions and historically, that field of membership was the common employer or industry. In fact even today, one of the most common fields of membership is education – there are a multitude of teachers’ credit unions around the country. But in the past 10 years, the fields of membership have shifted to a more community-based approach to allow credit unions to grow and diversify their membership base. It is hard to find a location in the US where there is not at least one credit union available to residents. In order to “join” a credit union, there is typically a modest membership fee – typically $5. Locate your local credit union at www.ncua.gov.
Credit unions have a tradition of conservatism. Just 5 years ago, that conservatism was a source of frustration for business. Credit unions are also prohibited by government regulation from lending more than 12.25% of their assets to businesses – this is largely a tip of the hand to banks who have long-fought the credit union’s tax exempt status.
As a result, credit unions have very straight-forward basic business products and loans. Do not expect creativity and a lot of business banking services. Yet, many credit unions have formed business banking initiatives either independently or in combinations known as credit union service organizations, or CUSOs. A CUSO is a cooperative of credit unions formed in order to leverage their relative assets into a meaningful approach to providing services. Some CUSOs form for the purposes of creating an ATM network for service efficiency. Some CUSOs offer centralized underwriting and sourcing of indirect auto loans. One of the popular CUSOs is a business lending initiative allowing small credit unions to participate in medium-sized business lending.
Business lending is available from credit unions and the CUSOs can utilize SBA programs, if they choose to participate. An Ohio CUSO, Cooperative Business Services or CBS, has a commercial loan portfolio of about $210 million and 350 active credits. They entertain loan applications from $10,000 to $7.5 million, but the typical loan is between $250,000 and $2 million and often the loans are for commercial real estate (Hooker, Lisa, “Flight to Safety”, Columbus CEO Magazine, August 2010, p. 33-36). By visiting your local community credit union, business loans can be sourced to their own CUSOs in many communities. And, in some cases, larger credit unions will make their own small business loans. Expect conservative underwriting – which is not to say that visiting a local community bank would not get the same conservative underwriting approach.
It is unlikely that a business will find cash management services at their local credit union. If you are seeking complicated cash sweep arrangements, it is unlikely that you will find anything more than online bill pay and transfer capabilities at a credit union. It is also unlikely that a business will find merchant services at a credit union. Most credit unions participate in credit card programs that are tailored to their members, most of which are individuals and their families.
But credit unions will likely pay a bit of a premium to local banks when it comes to interest rates on deposits and/or may be less likely to charge high service charges and fees. With the recent financial reform legislation, banks have already begun to eliminate free checking on small to medium balance accounts and most business accounts do not pay interest at banks, unless funds are tied up in investments or have limited withdrawal capabilities.
And credit unions offer standard online bill pay services – including services for their consumer members. With rising postage costs, this is a valuable service.
Small businesses may find that credit unions provide valuable financial services and a new source of small business credit. Visit your local community credit union and talk with their management about the services a credit union might provide to your small business.