Data from the 2015 Small Business Credit Survey indicates that small business loans sourced from credit unions had the second highest satisfaction rating from borrowers who received the funding. The survey was conducted by Federal Reserve Bank of New York. And thanks to a key change that took effect in May 2016, these loans are poised to become more attractive to borrowers. The important change here is that personal guarantees, also referred to as PGs, will be required on all small business loans offered by credit unions.
PGs require that borrowers agree to be personally liable should the business fail to repay the loan. According to the chief advocacy officer Ryan Donovan at the Credit Union National Association, personal guarantees can slow the lending process down.
Disadvantages of Personal Guarantees
• The amounts of small business loans are usually larger compared to personal loan amounts, which mean that the risk can be significant to the provider of the loan.
• The individual who signs the personal guarantee will still be held accountable to the loan even after they have left the company in case there is a balance.
• Personal guarantees usually involve personal credit checks and can impact on personal credit scores.
• In some cases, loans with personal guarantees will appear on the credit report of the business owner, something that is sure to affect their credit scores.
Personal guarantees appeal to lenders and other providers of trade credit. This, after all, gives such lenders other avenues of collecting their money should the business default. They also see PGs as added incentives to get business owners to pay on time. However, businesses with strong financial bases that have good credit scores are best to avoid PGs when shopping for loans.
All factors considered, it is in the interest of all businesses to avoid personal guarantees as much as possible. Unfortunately however, PGs aren’t always avoidable, more so for young businesses that still don’t have strong track records.
Since credit unions are nonprofit organizations, their loans tend to attract lower interest rates compared to other options for business financing like accounts-receivable financing or merchant cash advancing. Most credit unions provide both unsecured and secured loans. In addition, these institutions are more aware of the local economy as well as the needs of businesses in their locale. Credit unions may be willing to work with a business that looks promising but which has hard time securing financing.
As a matter of fact, during the recessions of 2001 and 2007, banks recorded negative growth rates for commercial loans, with credit unions recording positive growth rates.
On the flipside, there may be some membership restrictions. Some credit unions could be limited regarding the number of financing products they offer, more so if you consider that there are more than 44 financing products offered to small businesses today.
Credit unions are absolutely worth considering when looking for small business financing. As with anything else, credit unions have their advantages and disadvantages, but being open and honest with your local banker can get you the answers and services your business needs.
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