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2016-02-10 00:00:00Accounting & TaxesEnglishLoaning Money To Your Employees: Should I lend my employees money” is a perfectly legitimate question to ask. Doing so has its pros and... Loaning Money To Your Employees Is Not Such a Bad Idea

Why Loaning Money To Your Employees Is Not Such a Bad Idea

3 min read

“Should I lend my employees money” is a perfectly legitimate question to ask. Doing so has its pros and cons. On the positive side, loaning your employees money when they’re in dire financial need can help strengthen your relationship with them, and foster employee loyalty.

On the negative side, there’s always a risk that they won’t pay you back and that other employee will start approaching you for financial help. That said, the positives do outweigh the benefits, especially if you follow certain work-loan best practices.

The benefits

  • Employees who are stressed about money are distracted and unproductive. If you’re looking to restore balance to their on-the-job performance, and to your bottom line, you might consider giving them a loan. Employers who have done so report an improvement in overall performance.
  • You build employee loyalty and commitment. Your willingness to loan them money signals to your employees that you deem them worthy of the investment. It tells them that they mean something to the company, and demonstrates that you trust them. You could actually think of it as a small business employee benefit, and as an indirect investment in your company’s future.
  • It earns your company an employee-friendly reputation. The more you extend yourself to your employees, the deeper your roots in the community, and the more trustworthy you come to seem to potential clients.

These benefits only really only materialize if your employees are actually trustworthy. Is there a way for you to ensure that they don’t take advantage of your generosity? There is also the possibility that other employees will come to hear about the loan and start turning to you for help. You are unlikely to have stashes of money waiting to be lent out and are going to have to let people down.

Fear of coming across as an easy target is not unusual. The truth is, if you’re choosing to lend or give someone something out of the kindness of your heart, it isn’t correct to expect something in return. After all, it’s meant to be a selfless act.

Precautions On the other hand, you’re running a business, and you’re offering your employee a loan in your capacity as CEO. This is clearly not an individual, random act of generosity but one that hinges on your professional relationship with the employee that you are extending the loan to. Here are some precautions you can take to ensure that the entire process is transparent, unbiased, and not financially detrimental to the business.

  1. Put in place an official framework or protocol to regulate employee loans. Create a set of criteria that have to be met before your employees become eligible for a workplace loan. Also, spell out things like the interest rate and the terms of repayment (will you be deducting the amount from their monthly incomes or will they be paying you separately?) Make sure your employees sign an agreement stating that they understand the terms and conditions of the loan.
  2. Keep a record of such transactions. Don’t try to do it ‘under the table’ as this could create tax-related complications in the future. Make sure the practice is out in the open. Once you have a stringent system in place, you won’t have to try to keep this a ‘secret’ to avoid a deluge of loan requests.

Loans don’t have to turn into liabilities. When handled correctly, and properly systematized, employee loans can be added to your company’s list of employee benefits. Your employees—and your bank account—will thank you for it.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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