What it means
A credit union is a member-owned financial cooperative. Instead of customers placing deposits with a bank, members buy a share in the credit union, and the money they hold there is called their share balance.
When a member writes a cheque from that balance, the cheque is called a share draft. For the person receiving the payment, a share draft looks and behaves very much like an ordinary cheque.
It is deposited at the recipient's bank, cleared through the normal payment system, and the amount is taken from the member's share account. The practical difference is mostly the name and the legal structure behind the account.
Because the member is an owner, the return on the balance is called a dividend instead of interest. Many share draft accounts pay little or nothing, in the same way that many ordinary current accounts do, but the dividend rate can vary by credit union.
In the United States, share balances at federally insured credit unions are protected by a national insurance fund up to a limit, similar to bank deposit insurance. For a small business or a finance team, a share draft account matters when dealing with employees, members or suppliers who bank with a credit union.
Payroll, expense reimbursements and supplier payments may all arrive as share drafts. Reconciling these items works the same way as for any other cheque, with attention to the date on which they clear.
Members who use share drafts often receive their statements with images of the cleared items, which makes record keeping easier. A bookkeeper can match each draft number with the invoice it settled, and unusual items stand out quickly.
Many credit unions now also offer online bill payment and debit cards on the same account, so the share draft is only one of several ways to spend from it. The nuance is that credit unions may place limits on business accounts, and the availability of funds for a deposited item depends on the rules of the receiving bank.
A share draft that is returned unpaid, for example because of insufficient funds, creates the same collection problems as a bounced cheque.
In practice
Real-world examples.
Example
A teacher who is a member of a school employees' credit union pays her landlord with a share draft. The landlord deposits it at his bank, and a few days later the amount leaves her share account.
Example
A small contractor receives a share draft from a customer as payment for a $2,400 repair. The contractor's bookkeeper deposits it, records it as cash received, and checks that it has cleared before releasing the finished work.
Example
A company payroll department finds that several employees have asked for their pay to be sent to credit union accounts. The department confirms the routing details for each account and reconciles the payments against the bank statement.
Formula
Calculation
Available share balance = current share balance - share drafts not yet cleared - holds
Suppose a member has a share balance of $4,200. She wrote share drafts of $850 for rent and $300 for a utility bill that have not yet cleared, and there are no other holds on her account. Her available balance is 4,200 - 850 - 300 = $3,050. If she writes a further draft for $3,200, it would exceed the available balance by $150, and it would risk being returned unpaid or triggering an overdraft fee.Case study
Seen in the real world.
Elmwood Community Credit Union is an illustrative, fictional member-owned institution serving local hospital staff. A member had written a share draft for $1,100 on the last day of the month, expecting a salary deposit that arrived two days later.
The draft reached the credit union before the salary did and exceeded the available balance. The credit union returned it unpaid and charged a fee, and the payee also charged a returned-payment fee of their own.
The credit union's member services team later introduced overdraft transfers from the member's savings share, so that a draft would be paid from a linked balance. The illustrative lesson was that understanding the timing of clearing is just as important as the account balance.
Watch out
Common mistakes.
- Assuming a share draft is a different kind of payment from a cheque, when it is simply a cheque drawn on a credit union share account.
- Writing a draft against a balance that includes deposits which have not yet cleared.
- Expecting interest on the account, when credit unions pay dividends that depend on the institution's earnings and policy.
Questions
People also ask.
Is a share draft account the same as a current account?
It does the same job, but it is held at a credit union and is based on a member's share in the cooperative.
Can businesses use share drafts?
Many credit unions offer accounts for businesses, although their products and limits vary from one institution to another.
Are share draft balances insured?
In the United States, federally insured credit unions are covered by a national insurance fund up to a limit, so members should check the cover that applies.
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