Employees often go through problems or financial crunches from time to time and that is when they turn to their employer. Most employers, especially when they are small business owners, view their staff akin to family members and want to help out. However, there are certain issues to be addressed before an employer can lend money to an employee.
There might not be any right or wrong answer when someone seeks a loan. Your decision however should depend on certain facts as well as circumstances. Before you deice to offer loans to someone on the payroll there are certain questions that should be asked:
- What are the assurances of being repaid? If the employee defaults on repayment, what material loss would you suffer?
- There might raise an instance that you need to terminate the worker before loan repayment is done.
- You might set a dangerous benchmark for others and become an easy target by other employees.
- How do you want to make the loan payment, as a personal loan or a business lending?
Other ways to help
For employers who do not want to become lenders there are other ways one can help out needy employees:
- You can provide advice on loans that they can take on retirement plans. When employees are provided accounts on 401 (k), such plans often allow loans and businesses need not become lenders. The plan should include a reasonable interest rate and repayment needs to be done in level payments in a time period of five years or less. There should be a clause that an employee can borrow about 50% of their account balance and that the loan needs to be repaid in full, within a time period of 30 to 60 days, before an employee leaves a job, voluntarily or otherwise.
- Advance paycheck of one month or a payday loan could be an affordable option for an employer which can help meet short term needs of employees and whats a good credit score they have. This indicates the payment of wages of the next month that is made before the monthly wage cycle falls due; ensure that you as well as your employee understand the significance of advance and that payday loans can only be made on a one time basis whereby taking up such loans from commercial lenders would attract high interest rate after the repayment date is up.
Formalize the terms
When you agree to lend to an employee ensure that you make the employee sign on a promissory note that states terms of how to repay the loan. The repayment terms should be spelled out on the note such as interest rate and frequency of payments as well as what happens if there is a default on the loan. Templates can be found online to create a promissory note that would be binding but it would be wise to get it done by a legal attorney.
You could be magnanimous in keeping the terms lenient and interest below on the market, but also remember that loan rules for businesses apply as per company taxation.
It would be great to help out your staff, but with the complexities involved, it is best that you say no as a policy to stem the requests from needy employees.