In this blog, we'll talk about credit union business accounts. We'll look at what they have to offer. And, we'll also discuss how and why they can be a great fit for small-to-medium businesses.
Credit Unions are a Natural Fit for Small-to-Medium Businesses
Small and medium-sized businesses need to have the same opportunities available as larger businesses and corporations. However, they often lack the needed amount of seed money or enough collateral to open accounts at national branch-based banks.
While credit unions (CUs) sometimes get overlooked when it comes to business accounts and loans, they are a natural fit for local business owners. Credit unions are local to a specific area, and they operate in the same area as local businesses.
By joining a credit union (CU), businesses show their support for another local one. In turn, those local businesses gain the benefits of credit union membership, along with support to help their businesses thrive.
What is a Credit Union?
Simply put, a credit union operates as a nonprofit. Anyone that joins a CU is a member and partial owner. Credit unions function as cooperatives; many have specific criteria to join. However, not all CUs have stringent membership requirements.
When a CU decides to open in a specific location, by default, it has created a public credit union. Therefore, as long as you work or live in that area, you may join. Other CUs may have different requirements, so always check the National Credit Union Association, the overseeing body that regulates CUs, to see the different credit union classifications and which type meets your needs.
In contrast, banks operate as for-profit intuitions. They sell or upsell products to ensure money continuously flows into their institutions. Banks report to outside shareholders. Those shareholders have no legal obligation to store their own money at that institution, even if they sit on a particular bank’s board. Anyone may become a bank customer, but that customer usually needs to keep higher balances in traditional bank accounts.
How are Credit Union Business Accounts Different than Big Bank Business Accounts?
Credit unions cater to loyal communities – their offered products reflect this, including ones designed for small and medium-sized businesses. When you join a credit union, you support a local business – just like the one you own or hope to start. You should expect your chosen CU to support your business endeavors.
Credit unions uphold missions to support all individuals within their communities. Once you join a CU, you become an owner of this type of cooperative.
An important distinction is that CUs only use the money they need for their operating costs. Extra profits, also known as overages, find their way back to members in the forms of dividends, lower rates, and fees.
Think of this as a continuous circle. Any amount of money you invest in a CU has the ability to help another member. Your CU then takes membership fees, deposits and the interest it makes from other members. It uses the overage and invests that back into its offerings. This is how credit unions offer lower fees and rates. Additionally, using the overage is how they retain the ability to approve loan applicants that traditional banks reject.
Most people know that checking accounts offer lower interest rates when compared to other banking products like savings accounts or money market accounts. Despite that, traditional banks often require customers to keep high balances. New small business owners may lack the ability to keep those balances in their accounts. They need more flexibility to determine operating costs, and they have different timelines regarding when they open accounts.
Furthermore, local businesses serve the surrounding communities in which they operate – just like credit unions. Traditional banks have no obligation to assist them. This is where credit unions have an advantage, especially for small business owners.
They may lack collateral, a prime credit score of 750 or more, or stable credit history to secure a loan from a large bank. Simply put, larger financial intuitions have never truly catered to this segment of the population.
Think about how a traditional branch-based bank operates when it comes to accounts. Instead of a circular pattern, visualize a straight line – that line leads directly to a bank's shareholders. Legally, banks have to put the needs of shareholders before their customers.
When it comes to banking options for business accounts, national banks cater to big businesses. Smaller businesses cannot match the amounts that larger firms put into their business accounts. Even if a bank operates to serve a general area – and is classified as a regional one – it follows the same guidelines as national ones. Regional banks still report to outside shareholders. Those shareholders have no legal obligation to put their money into one.
A gap continues to exist in the marketplace for small and medium-sized businesses, along with entrepreneurs. However, credit unions have focused on eliminating this gap. They continue to provide ways to help small business owners, and they update their offerings to help those businesses become an essential part of the overall community.
What Type of Business Services and Accounts do Credit Unions Offer?
After paying the membership fee, you need to open some type of CU business account – known as a share account. Once you open a share account, you may use other CU business products and services.
The two share account types are:
- Share savings account – this is the equivalent of a bank's savings account; it pays dividends like banks pay interest.
- Share checking account – this is also known as a draft account; it equals a bank's business checking account. The emphasis is on liquidity – money that businesses need for their day-to-day operating costs. Draft accounts should only include money needed for these costs, taxes and payroll expenses.
Keep in mind that most financial lenders pay very little when it comes to interest on any type of checking account. For a share savings account to generate income based on interest, know the following:
- Expect a better rate when you keep more money in an account.
- Interest rates may change daily.
- The interest rate accrues based on how your financial institution compounds the interest. Some online banks may compound interest daily. Other banks take this step on a monthly, quarterly or yearly basis. It works to your advantage when your chosen financial institution compounds interest daily – you earn interest at a quicker rate.
After Your Business Joins a Credit Union
After joining, review your business needs. While business checking and savings accounts work together, do not get ahead of yourself. Use the below logic to determine how and when you open CU accounts:
- If you are in a start-up phase, focus on a business checking account first. While most types of checking accounts provide low annual percentage rates, a CU rate is often higher than a branch-based bank. Additional benefits include:
- A commercial account establishes that you have a credible company. Use this business checking account for operating expenses, taxes and employee payroll when applicable. Let's use a local pet sitting company, which operates as a sole proprietorship, as an example. While this company has no additional employees, many pet sitting companies exist – there is too much local competition. If you lacked access to business accounts, perhaps you asked your clients to pay cash. Then, you put that cash into a personal checking account. Now, ask yourself if a professional business operates that way. When you conclude you need more credibility, join a CU and take advantage of the lower fees and low minimum balances. This type of account comes with a debit card – this sets the impression that you understand the importance of cash flow and how to use the account.
- When you feel confident you have enough money in your draft account, consider opening a share savings account. The purpose is to store money for your business. Credit unions offer higher APRs on business savings accounts. Legally, any financial institution limits you to six withdrawals from any type of savings account within a month. If you cannot cover your overhead costs, but still need another type of account, pick a business product that requires the least amount of money from you.
- Consider a certificate of deposit – while not classified as a type of business account, CDs offer higher rates on return. Only open a CD if you know you have enough business capital and the ability to meet the defined terms. You will pay an early withdrawal fee and need to report that on your taxes if you take out that money before the specified period ends. Data supplied by deposit accounts reported CD rates as of June 2019. Those rates are as follows:
- Credit union rate – a 12-month CD had an APR of 1.42%
- Traditional bank rate – for the same one-year period, banks offered an APR of 1.1% on that CD.
- Look at other CU products – many credit unions have a partnership with vendors, which may also support other aspects of your business like managing payroll options.
- Decide if you need a small business loan to start your business or to reinvigorate an existing one.
Credit Unions Differ From Banks When it Comes to Loans
Credit unions do not have to follow the strict loan requirements that banks impose. Credit unions see you as an individual and not as a dollar sign. This allows CUs to work with first-time business owners or those that need to refinance existing loans.
Traditional banks look to see if you fall into one of the prime credit score categories – meaning you have a credit score of at least 750 or more. If not, larger banks will likely deny your loan application.
This is where your local credit union shines. Your assigned loan officer will take your credit score and history into consideration, but other factors come into play, especially for existing members.
Therefore, if you fall into a subprime credit score category – meaning you have a score of 580 or below, do not automatically rule out a credit union.
Figures over the last few years indicate that consumers need a better understanding of credit union business offerings, especially loans. Despite credit unions reporting a total of $71 billion in commercial loans in 2018, only 9% of consumers opted to obtain a credit union business loan.
A 2017 Federal Reserve survey reported that only 40% of the population applied for business loans. That figure decreased by 5% from 2016. The decrease is actually good news for new small business owners. Less competition means financial institutions have more funds to spare. More lenders granted applicants the full loan amounts.
The small business landscape continues to change – thanks in part to a greater commitment from the Small Business Administration. The SBA offers a variety of guaranty programs – loan types designed specifically for small business owners.
The National Credit Union Association, the overseeing body that regulates credit unions, has partnered with the SBA. On April 30, 2019, they jointly announced a new three-year loan program. This program connects small businesses with CUs. Therefore, credit unions may actively promote and encourage their members to apply for one of the SBA guaranty loans.
This new partnership concretely shows that credit unions have deeper connections to local businesses. They know how to assist new business owners as well as those looking to expand a current one.
Additionally, credit unions offer more than SBA loans. Other business loan options relate to either direct spending or indirect costs. Other business CU loans include:
- Credit lines
- Auto loans
- Loans for business equipment
- Mortgages for commercial real estate
Credit union business accounts apply to nonprofits too. Because CUs are non-profit organizations, they know how to help other nonprofits meet their goals. Whether you need to fund a synagogue or church, a local lodge or a charity, CUs offer ways for nonprofits to earn more on savings. The extra accrued money allows not-for-profits to set annual amounts and monitor them. This gives nonprofits a better way to reach their fundraising goals.
What are the Benefits of Credit Union Business Accounts?
When you own a business or work as a sole proprietor, keep your personal expenses separate from your business ones. Credit unions make it easy to separate these.
To open a business checking or savings account, many CUs require only a small deposit – some start at $5. Additionally, many accounts have zero maintenance fees.
When you open a CU business account and use other services, you grow your business. Now, you are likely wondering what are the benefits of a credit union business account. Benefits are numerous and are as follows:
- Reach short-term and long-term business goals – all services and accounts complement each other. Use your timeline to decide when you need to open a specific account or add complementary business vendors.
- Earn interest – many CU accounts earn interest when you put as little as $100 into an account. That amount is much smaller than what traditional banks require.
- Withdraw and transfer money into accounts as needed – most credit unions offer low minimums on business savings and checking accounts. Therefore, do not worry about fees if you need to move money from accounts.
- Business checks – these checks also help you separate your personal savings account from your draft account.
- Business credit cards – if you have numerous employees, credit unions supply one for all your designated employees that need access to funds. Your CU has the ability to set spending limits. Also, consider:
- Many credit unions offer zero balance transfer fees for the first 12 months.
- CU business cards likely come with no annual fee.
- Business ATM cards – credit unions do not charge for using out-of-network ATMs. Additionally, over 5,600 credit unions belong to the CO-OP network. This means many CUs have formed a larger cooperative – this allows members to use any shared-branch location within this network. You may use any services inside another member's branch, at an ATM or through an interactive teller machine – all without incurring any fees.
- Rewards – many business accounts offer cashback and points for eligible business purchases.
- Mobile banking – bank online and via a mobile app just as you would with a personal checking or savings account.
- Alerts – set the alerts you need for your business. This allows you to monitor spending while your CU looks for fraud.
If you operate a business in Jacksonville, Fla., or in Duval County, and understand all the ways credit unions work for you, 121 Financial offers many options.
When you open a checking or savings business account with 121 Financial, you receive the following:
- A business services team – this team focuses on growing your local business or helps you get started with one. The dedicated team supports you as an individual and as a business owner.
- Overage advantages – any surplus our credit union makes goes into business accounts too. If you have fair to poor credit, overages may help you qualify for a business loan.
- Voting rights – when you pay the small membership fee and make a deposit, you become a partial owner. Your ownership translates into one vote. You use this vote when assigning our board of directors. Volunteers and other 121FCU members make up our board. You know that the board supports all our members, including you.
- Accesses to vendors – Our vendor partners assist with payment solutions, employee payrolls, and HR issues.
How Do I Open a Business Account with a Credit Union?
If you already belong to a credit union and have an account – like a personal savings or checking one – you may open a business account or apply for a business loan.
If not, ask yourself what do I need to open up a business account with a credit union.
Follow the steps to open a business account:
- To become a member, pay a one-time membership fee, which typically ranges from $5 to $25.
- Then, make a small deposit into a draft account.
- From there, review the rest of the offered business options.
- Finally, add products to your overall business portfolio when financially solvent.
While you may open many types of accounts online or over the phone, business accounts may work differently. Because of the various types of corporations, including if your own a limited liability company, check with your chosen credit union. Your CU may require you to open the account in person. In general, consider that even if not required. It gives the CU employees a chance to understand your needs from the start.
Some credit unions have decreased membership requirements throughout the years. If you have yet to seek out a membership, use the below to guide you:
- When a credit union decides to open in a specific area, by default, it becomes a public credit union. This means that anyone living or working in the local area may join.
- Always check for other requirements as some CUs require enrollment in college, that you work in a specific industry or that one of your immediate family members has a membership.
- Many large corporations establish their own credit unions, which makes CU banking even more accessible. If you work for a large company, contact your HR generalist for more information. Your HR contact should have the available paperwork and the ability to answer your questions. Working for someone else does not mean you have to put your independent business dreams on hold.
- Even if you do not meet all requirements, another option exists. Some CUs may ask potential members to make a small contribution to their charity of choice instead.
The above is not the entire list of potential requirements. However, it shows potential members that CUs place emphasis on linkages and commonalities. When members share a common bond, they gain a greater understanding of how credit unions support the overall community, families, and the individuals who live or work in the area.
Make sure you join a federally-funded CU. While the FDIC insures bank deposits up to $250,000, this agency does not insure credit union deposits. That belongs to the NCUA. This independent federal agency insures business deposits for the same amount as banks - up to $250,000.
Credit Unions are an Ideal Fit for Smaller Businesses
All credit unions must serve the needs of all individuals and businesses within the same hometown. A deeper bond exists because members own their credit unions.
Credit union employees typically know their members. CU employees remain loyal to their members, and they never report to big business. Because of the lack of interference from outside stakeholders, business accounts come with fewer restrictions. Draft accounts, share savings, CDs and targeted small business loans offer solutions for small and medium-sized business owners, nonprofits and entrepreneurs.
If you own and operate a small or medium-sized business in Jacksonville or within Duval County, or you wish to start a local business, our federally-insured credit union offers many solutions.
For more information, please visit our website, contact us or stop in to see how we support our community.