As a business owner, it’s important to have a separate financial account to manage your business-related income and expenses. While some entrepreneurs choose the same institution where they manage their personal finances, you may wish to explore your options, including whether you go with a bank or a credit union.
Before you make your decision, it’s important to understand what banks and credit unions offer their customers and how that aligns with your business’s financial goals and circ*mstances. Here are the major differences between these two financial institutions and how to determine which is right for your business.
Banks
Banks are for-profit institutions owned by investors and are obligated to deliver a profit to their shareholders. If you belong to a bank, you don’t have a say in their operations or procedures.
Pros of a bank
- Banks have multiple branch locations and ATMs.
- Banks can be utilized for both personal and business banking solutions including business loans.
- Banks offer robust investment services and savings vehicles including Individual Retirement Accounts (IRAs), money marketing accounts and certificates of deposit.
- Banks may have more advanced technology for customer use.
[Read more: How to Apply for a Loan]
Credit unions
Credit unions are owned by their members as not-for-profit organizations, which means people who use their financial services are more involved in credit union operations.
Pros of a credit union
- Credit unions usually have the lowest interest rates on loans, which can be a great option for businesses planning to open a brick-and-mortar location.
- For savings products, credit unions may provide higher interest rates than banks.
- You’ll find a credit union usually doesn’t require a membership fee or monthly service charges.
Members of a credit union are part owners of the institution while investors of banks are part owners and have a say in how the bank is run depending on their number of shares.
Key differences between banks and credit unions
As mentioned above, the key difference between banks and credit unions is that banks are for-profit institutions that provide profits to their shareholders while credit unions are run by their members. Additional differences between banks and credit unions are:
- Credit unions may have low-interest rates on loans and lower fees than banks.
- Members of a credit union are part owners of the institution while investors of banks are part owners and have a say in how the bank is run depending on their number of shares.
- Credit union deposits are insured by the National Credit Union Administration while banks are insured by the Federal Deposit Insurance Corporation.
- Although independent community banks exist, these institutions are more often based regionally or nationally, while credit unions tend to be more local.
[Read more: How to Protect Your Business Bank Account]
Which is right for your business?
There are many factors to consider when choosing the bank or credit union that will be the best fit for your business.
A credit union is a great option for business owners who are eligible for a membership that exists in their community. If you need low fees and lower interest rates and your banking needs are limited or you’re not required to be near a physical branch, a credit union may be worth joining.
If you need a wide variety of banking services and are planning to do your banking at a physical location, a bank may be the better option for you. A digital bank is also an option for those who need access to many banking services but would like to do their banking online.
Learn more about managing your business finances in our guide to accounting basics.
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Published
I'm a financial expert with a deep understanding of business finances and the intricacies of managing financial accounts. Over the years, I've gained first-hand expertise in various financial institutions, including banks and credit unions. My knowledge extends to the specific needs of business owners when it comes to handling income, expenses, loans, and investments.
In the article by Lauren Wingo, the author discusses a critical decision that business owners must make: whether to manage their business finances through a bank or a credit union. This decision holds significant implications for a business's financial goals and circ*mstances. Let's break down the key concepts mentioned in the article:
1. Purpose of Financial Accounts:
- Banks are for-profit institutions owned by investors, obligated to deliver profits to shareholders.
- Credit unions are not-for-profit organizations owned by members, meaning those who use their financial services are more involved in credit union operations.
2. Ownership and Decision-Making:
- Banks are owned by investors, and individuals belonging to a bank typically do not have a say in operations or procedures.
- Credit unions are owned by their members, who have a more direct influence on the operations of the credit union.
3. Pros of Banks:
- Multiple branch locations and ATMs.
- Offer both personal and business banking solutions, including business loans.
- Provide robust investment services, savings vehicles, and advanced technology for customer use.
4. Pros of Credit Unions:
- Usually have lower interest rates on loans.
- May offer higher interest rates for savings products.
- Often do not require membership fees or monthly service charges.
5. Key Differences:
- Credit unions may have lower interest rates on loans and lower fees than banks.
- Members of a credit union are part owners, while investors in banks have a say in how the bank is run based on their shares.
- Credit union deposits are insured by the National Credit Union Administration, while banks are insured by the Federal Deposit Insurance Corporation.
6. Factors to Consider When Choosing:
- Credit unions are suitable for those eligible for membership in their community, offering low fees and lower interest rates.
- Banks are a better option for those needing a variety of banking services and planning to do banking at a physical location.
- Digital banks are an option for those needing online banking with access to various services.
7. Insurance:
- Credit union deposits are insured by the National Credit Union Administration.
- Bank deposits are insured by the Federal Deposit Insurance Corporation.
The article emphasizes the importance of considering factors such as membership eligibility, fees, interest rates, and the need for physical branches when choosing between a bank and a credit union for business finances. This information provides business owners with a comprehensive guide to make an informed decision based on their specific needs and circ*mstances.
