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If you’re starting a business and need financing to get your venture running, credit unions are an excellent option for getting a business loan. Credit union business loans may be easier to qualify for than other types of loans. Before you select a credit union for a business loan, consider choosing one that meets your business’s borrowing needs by understanding common eligibility criteria, application requirements and loan features.
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7 Steps To Get a Business Loan From a Credit Union
Follow these steps to get a business loan from a credit union.
1. Determine Your Financing Needs
Before applying for a business loan from a credit union, determine your financing needs. Doing this first can help you decide how much you need to borrow, calculate how much you can afford in monthly payments and, ultimately, ensure you request the appropriate amount.
Start by creating a detailed business plan outlining your projected expenses and income. Alternatively, review your business’s existing business plan and financial records to identify your cash flow needs and determine how much financing you require to cover any gaps. Also, consider your preferred loan repayment period, as this will impact monthly payments and the overall cost of borrowing.
2. Check Your Eligibility
Evaluating your eligibility before applying for a loan with a credit union can help increase your approval odds. While your credit score plays a significant role in loan approval, it’s not the only factor lenders consider—especially with small business loans.
These are some of the common eligibility criteria lenders require:
- Credit score. Credit unions typically require a personal credit score of at least 680 to qualify for a business loan, but this requirement may be as low as 580. Requirements vary by financial institution, so check each lender’s credit score thresholds to evaluate your approval odds.
- Time in business. Most credit unions require a minimum of one to two years in business to qualify for a loan. However, some may be willing to consider newer companies if they have valid evidence of financial stability.
- Annual revenue. Different credit unions may require different levels of annual revenue. Generally, your business should have at least $100,000 to $250,000 in annual revenue to qualify for financing.
- Collateral. Depending on the loan amount, many credit unions require collateral to secure their funds. Collateral could be a real estate deed, a vehicle title or other valuable assets within your ownership. If you intend to take out a large business loan, evaluate your available collateral before applying.
Speak with a credit union representative to learn about specific lending requirements. Be prepared to provide detailed information about your business to get the most accurate assessment of your approval odds.
3. Research and Choose the Right Credit Union
Once you determine your financing needs and check your eligibility, research available credit unions to find the right one. Then, compare the financial institutions and consider these factors:
- Available loan amounts. Credit unions offer a variety of business loan types and amounts. Consider the minimum and maximum loan amount offered to ensure the credit union can finance your specific needs.
- Repayment terms. Most credit unions offer repayment periods from one to five years, depending on the type of loan. Check each potential lender’s flexibility to confirm you can repay the loan in a way that works for your budget.
- Interest rates. Interest rates vary at each financial institution, so compare multiple lenders before deciding. Many credit unions also offer promotional interest rates and special discounts on certain loans, so ask about these options.
- Additional fees. Most business loans come with additional costs, such as origination fees and closing costs. Evaluate the total cost of borrowing before committing to a loan.
- Customer service. Credit unions may offer a variety of customer service touchpoints, such as online banking and in-person branches. Consider the convenience of each lender’s services based on your needs.
- Reputation. Read online reviews and speak with other business owners to learn about their experiences with potential lenders. If you already have a relationship with a credit union, consider its business loan options first.
4. Gather Required Documents
The documents needed to apply and qualify for a business loan also vary by credit union. However, there are several documents that most financial institutions require. Organize these materials before applying to expedite the application process and ensure you can answer questions from your loan broker:
- Business plan. Your business plan is the foundation of your loan application. It should include an executive summary, market analysis, marketing strategy, financial projections and management team.
- Financial statements. Provide copies of your balance sheet, income statement and cash flow statement for the last two to three years.
- Tax returns. Gather your business’s federal and state tax returns for the last two to three years.
- Bank statements. Collect your business’s recent bank statements to provide evidence of cash flow and assets.
- Identification documents. Be prepared to provide copies of your driver’s license and other forms of ID, such as a passport or Social Security card.
- Cash flow projections. Create a detailed cash flow projection for the next year that outlines your expected income and expenses.
- Profit and loss statement. Provide a profit and loss statement for the last three years that includes your income, expenses and profits.
5. Become a Member of the Credit Union
To become a credit union member, you typically need to meet certain eligibility requirements, such as living in a certain geographic area or working for a specific employer. Once you determine your eligibility, fill out an application and meet any additional requirements such as depositing a small amount into a checking or savings account.
6. Submit Your Application
Next, prepare and submit your loan application. Loan officers at credit unions usually review applications within one to two weeks, but the process can take longer due to processing times or other factors.
7. Await Loan Approval and Closing
After submitting your application, a loan officer will review it and determine whether or not you qualify for financing. Depending on your financial situation and the strength of your application, you may need to provide additional documentation or even collateral to secure a loan. Respond to requests from your loan officer quickly to keep the underwriting process on schedule. Once everything is finalized, funds are typically available within five to seven business days.
Credit Union vs. Traditional Bank
Credit unions and traditional banks share many similarities, but there are a few key differences between banks versus credit unions. Banks are privately owned or publicly traded for-profit institutions. In contrast, credit unions are nonprofit institutions owned and operated by their members—often resulting in different services than those offered by banks.
Credit unions also tend to have more flexible eligibility requirements, lower interest rates, fewer fees and better customer service. That said, traditional banks often offer a wider range of financial products and services and have more physical branches for those who prefer in-person borrowing. Likewise, a traditional bank may be better if you want access to more advanced technology and tools like mobile banking and account management.
Pros and Cons of Credit Union Business Loans
When obtaining funding for your business, it’s important to weigh the pros and cons of credit unions and traditional banks before deciding.
Pros of Credit Union Business Loans
- Lower interest rates than traditional banks and online lenders
- Fewer fees
- Better customer service, including additional services like financial planning
- Flexible eligibility requirements
- Member ownership and a say in how the institution is managed
Cons of Credit Union Business Loans
- Limited lending capacity for larger loans
- Borrowers must meet membership eligibility requirements
- May have fewer branches and ATMs available than traditional banks
- Limited number of products
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