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Credit Unions and Business Financing

Credit Unions and the Small Business Loan Market

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Credit unions were originally developed to serve the underserved. Credit unions existed primarily to take deposits and make small loans to individuals in areas where there weren't many financial opportunities.

Characteristics of Credit Unions

Credit unions are tax-exempt, cooperative institutions. They are called cooperative institutions because their depositors actually own the credit union. Deposits are called "shares" as each deposit represents ownership in the credit union. They are tax-exempt because they are non-profit organizations.

In order to be classified as a credit union, the financial institution has to limit its membership to those who have some sort of tie. The tie can be that they live in one geographic place or work for one organization. Because of a credit union's nonprofit, tax-exempt status, they can often offer loans at lower interest rates than banks and pay higher interest rates on deposits.

Credit unions are operated by boards of directors who are composed of volunteers since profitability is not a concern. Of course, the upper management of credit unions are similar to the upper management of banks.

Credit Unions and Business Loans

Originally, credit unions were focused primarily on lending to underserved individuals. A limit was put on the business lending of credit unions, though they can lend to businesses that share the tie that would make a business eligible to be a member. That limit is 12.25% of assets. Credit unions have been lending to businesses in increasing numbers since the Great Recession and many are bumping up against the 12.25% cap.

Some want the cap on business lending to be lifted and to allow businesses to lend more to small businesses. Others think that it is not fair to allow credit unions to engage in business lending due to their tax-exempt status and businesses who are members of credit unions can get cheaper loans.

Others say that so many of the small businesses that need financing are one-owner businesses and sole proprietorships that are local in a community. They say that such businesses should be able to use credit union financing to secure adequate capital since banks are not loaning money as freely as they were before the great recession. In fact, credit unions offer all the products and services that most small businesses need.

If you, as a small business owner, are having trouble securing capital, see if there is a credit union in your area that you are eligible to join. Talk to the manager of the credit union and see what they have to offer you. Another source of financing for you to check out would be the local community banks.

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