Chartering and operating a credit union costs money. A credit union must remain solvent, meaning it must always maintain a positive capital position. New credit unions seldom generate sufficient income to cover operating expenses in the beginning. Therefore, you must seek monetary donations or subsidies to cover start-up and operating costs for the initial years of operation.
If your PFCU group is unable to secure adequate funding, consider requesting services from an existing credit union. You can locate an existing local credit union on the NCUA website. The NCUA can also assist with locating an existing credit union.
Types of support PFCUs generally receive include donations of:
- In-kind support, including office space, furniture and equipment, computers and recordkeeping software, and utilities
Support, subsidies, or donations for a PFCU may come from:
- Credit union industry participants, such as vendors, associations and mentors;
- Community organizations, such as religious organizations;
- Sponsoring organization, a company, or an association;
- Non-profit organizations, such as an economic development corporation; and
- Other grant programs, such as the Community Development Financial Institutions Fund.
EXAMPLE: If a sponsor company offers to provide office space free of charge and to donate $200,000 to cover start-up costs, the organizer’s letter should indicate the office location, the term (for example, the first 36 months of operations), and the size (such as, 1,100 square feet) of the free office space, and state whether they are also subsidizing ongoing costs, such as electricity, telephone service, trash removal, cleaning, security, or grounds maintenance.
Initial commitments or the concept of the plan to obtain commitments for donated funds are identified in the POC. If all pledges are not in writing at that time, the commitment letters must be obtained during Phase 2 and must be supported by the donor’s clear ability to provide the pledged support.
- If funds are committed but not received, obtain a commitment letter signed by the donor, who must have authority to commit and provide the funds; and financial statements, a bank statement, or other documentation of the donor’s ability to fund the committed amount.
- If funds have been received, provide a bank statement reflecting the deposit of funds and acknowledgement letter signed by donor confirming the funds are donations to the credit union, and not an investment or deposit. There must be no expectation of donated funds being repaid.
Any commitments that would require repayment are considered borrowings, not donated equity. As such, they cannot be counted towards the equity position of the PFCU’s pro forma financial projections. Subordinated debt is only available to low-income-designated credit unions after they are chartered. As such, subordinated debt can be considered by your organizing group as a strategic goal once your operation commences, but it cannot be included in your pro forma financial statements as donated capital for purposes of applying for a charter. See Part 702 (opens new window) (You will be leaving NCUA.gov and accessing a non-NCUA website. We encourage you to read the NCUA's exit link policies. (opens new page).) Subpart D of the NCUA’s Regulations for additional information and requirements for subordinated debt.
All commitments pledged must be in writing from their source and include the specific commitment and its terms. A sample commitment letter is found here.
Documentation Required for Donated Capital
- Identify the source of your funding and the actions and steps taken by the organizing group to obtain the necessary funds to cover the PFCU’s start-up costs and operations until the PFCU can become profitable. Provide details on the nature, terms, and conditions of all contributions, cash, non-member deposits, or other assistance provided to the PFCU. Any financial benchmarks for the PFCU that are tied to the commitment(s) or the repayment(s) should be discussed as well.
- Obtain the commitment in writing from the funding source and ensure the letter contains the following details regarding the commitment:
- Name of the person or entity making the commitment;
- Amount and timing of donations; and
- A statement acknowledging the funds are donated, with no expectation of repayment.