Bank Versus Credit Union

Business owners have many choices to make when picking a financial institution, from deciding where to bank to determining the best banking products for their needs. When making these decisions, there may be more than one type of bank that offers business services, and in many communities, there are credit unions that offer many of the same products that banks do. Even with those similarities, there are key differences in the ways that both types of institutions function and in the services they’re able to offer to both businesses and consumers. In the following discussion we’ll take a look at the question of bank versus credit union.

So, what do these two types of financial institutions typically offer to businesses, and why might one be a better choice than the other for your small business?

What Do Banks Have to Offer Small Businesses?

Easy question, right? The answer to this question is more complicated than what most people think. At their core, banks take deposits from their customers and use that money to make loans. But the number of other services and financial products that banks offer has grown over the years to the point that banks are now basically one-stop shops for insurance, banking, financial advisory services and more. Just to be more confusing, there are also investment banks that work for really big companies, but we aren’t including them in this comparison.

Banks are for-profit enterprises, meaning they need to generate value and manage their expenses to remain profitable. They make money from the interest that borrowers pay on loans that they’ve received and from fees that are charged for various services offered, but banks also pay out interest on certain deposit products. This tug of war between interest paid and interest received makes it difficult for banks to offer substantial financial incentives to their clients, though some still offer creative and lucrative savings accounts or other deposit products aimed at small business customers.

Credit Unions: A Good Alternative for Your Business?

The basic functions of credit unions are nearly identical to those of their bank counterparts. People generally become “members” of a credit union instead of becoming a customer, but the differences in how the accounts actually work are few. While banks are set up as for-profit businesses, credit unions are considered nonprofits, which means there are some key differences in the way they handle their business. It also means that credit unions are typically able to offer greater rewards to their members as a result of their tax status.

While large, regional credit unions do exist, the vast majority of individual organizations are much smaller than their bank counterparts. In some cases, a credit union exists to service members of a particular community or employees of a specific business and may be limited by this to accept only specific people into their membership base, such as employees and relatives of a business or people that live in a particular geographic area. For small businesses, that can be a challenge if the credit union is more restrictive and doesn’t offer free membership. But it can also be a big benefit if the business owner is able to get their company added to the union’s member rolls.

The Benefits of Banks and Credit Unions

Banks

Banks are able to offer some key benefits to business owners and can often be the best choice for their financial needs. Some advantages of banks over credit unions include:

  • Convenience – Because banks are not limited by any of the membership requirements of credit unions, they tend to be more convenient to join and access. Banks can expand their geographic footprint to service a larger swath of people, which makes it much easier to access a branch. Since banks also tend to be larger than credit unions, many of them are able to use that size and profitability to invest in more advanced technologies and services, like mobile business banking, specialized business bank account products, and innovative loan solutions for small businesses.
  • Services – Many banks have dedicated business teams that exist only to service business owners and their companies’ banking needs. This is one key advantage that banks offer over most credit unions and can be the one thing that makes using a bank the best choice for a business owner. Banks are more likely than credit unions to offer auxiliary services for small companies like credit cards and highly-tailored business loans as well.
  • Rewards – While credit unions generally offer better interest rates and fewer fees, banks try to make up for this with rewards on things like business credit cards and free business bank accounts. This can be a major draw for many business and personal banking customers that utilize those services heavily. Far fewer credit unions offer these services than their bank counterparts, and when they do the rewards are often less enticing than those coming from a bank.

As anyone can imagine, the drawbacks to banks include less personalized service and lower returns on deposits. The tradeoff for these points is that banks are able to service businesses much deeper into their growth stages, meaning banks (in many cases) can handle larger business loans, transactions, and financial needs.

Credit Unions

Don’t let their smaller size fool you. Credit unions can offer some serious value to their members, thanks to their community-based ownership and organizational structure. Credit unions have advantages for business owners like:

  • Cost – Without the drive to bring in massive profits for shareholders, credit unions can reinvest their profits into their membership base. This means more free account offerings, lower fees, better returns on interest-bearing deposits like CDs and savings accounts, and lower interest charges on loans.
  • Service – Many large banks rank lower on the customer service scale because they are simply too big to worry about every individual that banks with them. This is one area where credit unions really shine for business owners. Because they are usually smaller than banks, credit unions are able to offer more personalized service to each member. If your small business has a financial problem and needs a solution quickly, your credit union will be quick to help you out.

Credit unions, despite their reinvestment in the membership base, tend to lag behind in the ability to offer new and innovative banking technologies. They may also be limited in their financial offerings to businesses that have grown to need large and complex accounts and transactional services.

Banks versus Credit Unions: Which One is Best?

The short answer is “it depends”. Deciding between a bank or credit union for your business needs will boil down to a few key questions only you can answer.

  • How big is your business? If you have several employees and multiple locations, a bank may be able to serve your needs more efficiently.
  • How much do you value personal service? If knowing your banker by name is important to you, or you know you’ll need help with your finances from a knowledgeable and trusted partner, a credit union may make the most sense.
  • How much do you rely on generating interest in your bank accounts? Banks generally don’t offer as many interest-bearing deposit accounts as credit unions.
  • How much do you rely on technology? Banks are usually able to offer more advanced tech services to their business banking clients like online loan applications, mobile check deposits, account integrations with other financial services (accounting software, etc.), and may also be able to deliver custom technology solutions to each business they service.
  • Where is your business located? Credit unions are sometimes very limited in the areas and types of people or businesses they serve. If your location doesn’t fall within a credit union’s service area or fit the right kind of member profile, you may be limited to banks.

Banks and credit unions each carry their own benefits and downsides, especially when it comes to the sometimes-complex world of business banking. The variety of options in most areas can make it hard to make a decision, but also means that there are plenty of opportunities to shop around for the best rates, most appropriate services, and most convenient location for your business banking needs.

Tim Kelly

Tim Kelly

Mr. Kelly is a 20-year veteran in online business and financing.

He has consulted some of the top brokerages, media companies and financial exchanges in the area of finance, online marketing and content management including: The New York Board of Trade, Chicago Board Options Exchange, International Business Times, Briefing.com, Bloomberg and Bridge Information Systems and 401kTV.

He continues to be a regular market analyst and writer for ForexTV.com. He holds a Series 3 and Series 34 CFTC registration and formerly was a Commodities Trading Advisor (CTA).He was also a licensed Property & Casualty; Life, Accident & Health Insurance Producer in New York State.

In addition to writing about the financial markets, Mr. Kelly writes extensively about small business marketing and finance.

Mr. Kelly attended Boston College where he studied English Literature and Economics, and also attended the University of Siena, Italy where he studied studio art.

Mr. Kelly has been a decades-long community volunteer, he established the community assistance foundation, Kelly's Heroes. He has also been a coach of Youth Lacrosse for over 10 years. Prior to volunteering in youth sports, Mr. Kelly was involved in the Inner City Scholarship program administered by the Archdiocese of New York.

Mr, Kelly was Sr. VP Global Marketing for Bridge Information Systems, the world’s second largest financial market data vendor. Prior to Bridge, Mr. Kelly was a team leader of Media at Bloomberg Financial Markets.
Tim Kelly