Time and dedication required to start your own credit union

For those who have the entrepreneurial bug and the long-term insight to run your own business, starting a credit union -- a rather involved process -- is certainly within reach.

While membership in credit unions has increased, the number of credit union startups has been sluggish. Only five federal credit unions were issued charters last year, according to the National Credit Union Administration, the regulatory agency based in Arlington, Va. The numbers for new state-chartered credit unions were also low -- just 20 last year, according to the National Association of State Credit Union Supervisors.

Court battles stop openings
The reason for the low numbers vary but the main obstacle was the stall created by the court battles between banks and credit unions, which barred the addition of new members, says Lesia Bullock, a credit union administration spokeswoman.

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The first step in starting your own credit union involves some decision-making. "Starting a credit union should be approached like starting a business," Bullock says. "Each area of the business plan will be scrutinized and questioned."

First, consider if the credit union will be federally or state-chartered. A federal credit union is exempt from paying any income taxes, while state groups must pay state income tax. Federal credit unions also have the advantage of being allowed to establish branches in other states.

Secondly, what is the common bond? A common bond defines what the group will share in common, for instance, firefighters or college students.

Business plans and forms
There is some overlap in the startup rules for state and federal credit unions but generally, an application and business plan should be submitted.

The business plan should include:

A mission statement
A list of who will serve on the board of directors and their credentials
A budget for the first two years.
The name of the agency insuring the accounts

Similar to bank accounts, credit union accounts must be insured up to $100,000. Most are insured by the National Credit Union Share Insurance Fund, a government agency comparable to the Federal Deposit Insurance Corp. for banks and savings and loans.

Other key elements of the plan include noting the physical location of the credit union, the source of funds to pay expenses during initial months of operation and a projected membership goal.

The number of members is often a key to success, says Bullock.

"A charter application with a proposed field of membership of under 500 will have to demonstrate convincing support for the credit union," Bullock says. "For example, a small occupational group must demonstrate a commitment for significant long-term support from the employer."

Bullock says that depending on the scope of the business plan, the number of pages can range from five to 100. Once the business plan is submitted to either the federal or state agency, the notification process can take as little as a few months or as long as two years.

Barriers to starting a credit union
Some of the main obstacles that can slow the approval process include not having the required membership size and the lack of a short-term budget. If an attorney is hired to review documents, the process can take even longer, Bullock says.

The startup and approval process is neither seamless nor linear. Even if the credit union has been approved and issued a charter, the most common problem arises from the day the doors open: trying to avoid operating at a loss.

Ask Rev. K.Z. Smith about keeping the budget in the black and he might ask you to pull up a chair.

Since the Avondale Community Federal Credit Union in Cincinnati opened nearly a year and a half ago, it's been operating at a $40,000 deficit -- a far cry from the $100,000 it raised in the beginning.

"It's been an uphill climb, but we're confident that things will turn around by the end of the year," Smith says.

The African-American owned credit union offers its 1,200 members savings accounts, certificates of deposit and Christmas accounts. It also offers members signature and auto loans. But the main obstacle has been making more loans to generate enough income to help cover its expenses and offer additional services.

Steve Bosack, vice president of information services at the Credit Union National Association, says that in addition to money management, credit unions may face the challenge of having a staff of volunteers who may not have the experience needed to run a financial institution.

Still, Bosack says, "It takes a total commitment from everyone involved to make a credit union run efficiently, and the first year -- like any business -- is the hardest."

-- Posted: May 26, 1999