Give 'Em Credit

They're not just for car loans and home mortgages. Now credit unions are making business loans.
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This story appears in the August 2003 issue of Entrepreneur. Subscribe »

Curcio Printing Inc., a commercial printer in Vestal, New York, was planning a major purchase three years ago when a credit union paid an unexpected visit. The timing couldn't have been better: The family business needed $1 million to buy a new printer but was loath to borrow from its bankers, who, the Curcios felt, had lost touch with the growing company.

"We had heard about [new] laws that you didn't have to be a member of a certain organization to be a member of a credit union," says Gina Curcio, whose parents, Frank and Nancy, founded the $2.5 million company in 1984. "And we knew that credit unions could offer better rates." The family decided to borrow from Visions Federal Credit Union in nearby Endicott, New York. "Not only did we get the best rate, we got service, like banking used to be," says Gina Curcio, 34.

The Curcios were braced for a long process when they applied for the loan, their largest to date. As it turns out, the family acquired not only cheaper funds, but also a lender able to dispense credit quickly. More important, Visions was interested in the business, an element missing from previous credit relationships.

The Curcios are part of a growing contingent of entrepreneurs turning to credit unions for funding. That's because credit unions are picking up where many large banks have left off: that is, loans of $500,000 and under. Unlike banks, credit unions are nonprofit and don't have to pay income taxes or shareholder dividends. Therefore, they generally pay more for savings and may charge less on loans.

About 1,600 of the nation's 10,000 credit unions are active business lenders, according to the National Credit Union Administration. Many have converted to community charters, serving a geographic area rather than restricting membership to a specific industry or company. Meanwhile, bank consolidation, out-of-state loan decisions and the desire for more personal service have spurred entrepreneurs to extend their funding search to credit unions, whose product offerings and lending capabilities make them less discernible from banks.

Credit unions, nonetheless, have more limitations than their bank brethren. They are prohibited from making business loans totaling more than 12.25 percent of their assets and from originating unsecured loans. Recent regulatory developments are easing some of the restrictions, though. The SBA has opened its program to all credit unions, and the industry's trade group, Credit Union National Association, is helping credit unions originate the guaranteed loans by outsourcing certain functions, such as underwriting, servicing and even funding. "It's a flexible way to make sure no one has to be turned away from a credit union," says Eric Richard, the group's general counsel.

Still, credit unions are often better known for car loans than for business credit. "Individuals who have never been a member are not necessarily aware that a credit union may have similar capabilities as their local bank in the business lending area," explains David Doss, CEO of Columbia Credit Union in Vancouver, Washington. A combination of factors fueled his interest in business lending four years ago. Corporate downsizing prompted several members to launch businesses, while consolidation in the local banking market left seasoned entrepreneurs reeling from the treatment they were getting from their old banks. "All of a sudden the decisions were being centralized out of state, and [established businesses] felt as though they were being treated as start-ups," he recalls.

While proponents of credit union lending argue that firms with modest credit needs benefit, many loan-makers aren't just targeting smaller sums. Although the average credit union loan is $88,000, Doss has made a loan as large as $8 million.

Although credit unions have stricter regulatory requirements than banks, their lending capabilities are not dramatically restricted, says Bill Kelly, director of the Center for Credit Union Research at the University of Wisconsin, Madison. "I don't think a credit union would ever say 'The regulation doesn't let us do this.' They're much more likely to say 'We don't do this.' I don't think very much causes them to send away a business other than their own desires about whether it's the kind of business they want to do." Business owners are more likely to be affected by a credit union's lack of commercial lending expertise. "Businesses have to find [commercial lenders] they're comfortable with and [who] know what they're doing," Kelly adds.

The fact that many credit unions are relatively new to commercial lending makes them more attentive to a company's financial needs, maintains Gina Curcio. "Don't be afraid to check with your local credit union," she advises. "They carry that personal relationship right over into their commercial division."

Crystal Detamore-Rodman is a Charlottesville, Virginia, writer who covers the small-business finance market.

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