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Employee Loans, Good Idea or Bad?

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Employee Loans, Good Idea or Bad?

There is nothing unusual about an employee asking their employer for a loan, especially when faced with an emergency or financial hardship. Most employees prefer borrowing money from their employers as opposed to going for bank loans. This is attributable to the fact that the majority of businesses offer more favorable terms than banks while being able to line up repayment dates with paycheck times. However, lending money to employees is not always a good idea as there are pros and cons to be considered before you even contemplate forwarding loans.

Here are some of the advantages of lending money to employees:

Fostering Loyalty

These loans are likely to foster loyalty between workers and employers. Having received financial assistance from an employer, an employee will probably stick around as payback to their employer for helping them in their time of need. Besides, lending money to your employee entails placing faith in them to repay the loan. This places a moral obligation on your employee to remain committed to you, which may help with job satisfaction and worker retention.

Enhanced Employee Efficiency

Lending loans to your staff could foster enhanced efficiency among them, as they are able to concentrate more on their work. This is as opposed to having to deal with workers who are more concerned about overdue rent or medical bills piling up, which would make it more difficult to focus on their duties. It would, therefore, be prudent to lend an employee some money to work through these financial hardships, enabling them to improve their productivity. Besides, a loan could motivate your employee to work harder as they know that repayment of that sum is inevitable.

Advancing loans to employees could prove detrimental in the following ways:

Added Stress When Repaying loans

This often occurs when an employee borrows a loan for the purpose of meeting their regular and recurring obligations, such as rent and utilities. In such instances, extending a loan will often do more harm than good. If the employee cannot handle their obligations comfortably, an added monthly bill on top of their list could add stress, resulting in the lack of concentration and reduced focus on work. Such a situation will warrant counseling as opposed to extending a loan that may never get paid.

Increased Employer Tax Obligations

As an employer, be aware of the legal implications of lending money to your employees. You could end up paying more taxes in the event that the loan is not done properly. To avoid such, you will want to state the loan terms clearly in a detailed manner and apply the interest at the recommended federal rates. Improperly done loans will attract penalties; worse still, you could get charged with illegal lending practices.

Discrimination Concerns

The criteria for extending loans should be determined by the ability of every employee to repay their amounts, which can be established by reviewing their accumulated finances. However, you will find that while an employee’s financial health renders them a better candidate for a loan as compared to their workmate, extending a loan to one while declining to do so for the other could expose your company to discrimination lawsuits. Fortunately, the appropriate documentation of the exact reasons for refusing a loan to one employee in favor of another could save you from suits whose basis is discrimination.

That said, the positives outweigh the negatives, which is especially true if you follow particular work-loan best practices. Financially stressed employees are often distracted and unproductive. If you are inclined towards restoring balance to their on-the-job performance, you will want to consider providing them with loans, especially when they are in dire need of them. Employers who constantly provide loans to needy employees report significant improvement in their overall performance.

More importantly, Employee loans afford you an opportunity to build employee loyalty and commitment. Your willingness to provide them with loans signals that you deem them worthy of the investment, demonstrating trust and how valuable they are to your company. In fact, you could think of it as a minor business employee benefit, or even as an incidental investment in your firm’s future.

In addition, lending money to your employees will ultimately earn your company an employee-friendly reputation. The reason is that extending yourself to your workers through loans will gain you deeper roots in your community. This will portray you as a credible person who can be trusted by potential clients.

Precautions

The benefits of giving loans to your employees will only materialize if your workers are trustworthy. You will, therefore, want to find ways of ensuring that they don’t take advantage of your generosity. Some of the precautions to take in ensuring that the whole process is unbiased, transparent, and most importantly, not financially detrimental to your business include:

  • Implementing an official framework or protocol for the purpose of regulating employee loans. This involves setting mandatory criteria to be met before any of your staff can be considered eligible for a workplace loan.
  • Ensure to spell out such things as interest rates as well as terms of repayment. For instance, let them know whether they are expected to pay the loan separately or if you will be deducting the amount owed from their monthly incomes.
  • See to it that your employees sign a legal agreement, acknowledging the implication of taking a loan while stating that they understand the terms and conditions that come with it.
  • Keep a record of such transactions and avoid doing it discretely as this may later create tax-related complications.

Studies reveal that most people make just enough money to cover their day to day expenses. Subsequently, when something unexpected occurs that requires additional finances, they often don’t have ready cash and need to borrow it. A majority of them turn to their employers for assistance.

The question of whether you should lend money to your employees is a legitimate concern that troubles many employers. However, employee loans do not have to turn into liabilities. The appropriate handling of such employee loans while adhering to a stringent system could leave you with contented and motivated employees without having to compromise your bank account.

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