Time and dedication required
to start your own credit union
Do you have a few hundred friends who are fed
up with bank services and fees?
Then you've probably met the most important
requirement for starting a 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.
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.
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.
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
The number of members is often a key to success,
"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.
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