Employee Loans: To Do or Not to Do

Employee loans do not have to be large.

Employee loans do not have to be large.

Some business owners offer loans to their employees on a case by case basis; others implement a company-wide policy. Still others state that under absolutely no conditions shall the company make loans to employees.

Offer Loans with Clear Parameters

I believe you can offer loans to employees, but under very specific conditions. I think it’s a relatively inexpensive way to help recruit and retain employees. Major corporations offer loans to their executives — to buy homes, to buy stock upon conversion from options and a few other scenarios. So yes, I believe offering similar perks on a much scaled-down basis to employees can do some good, including building goodwill.

Hounded and Cajoled

However, unless your company provides a clearly stated employee loan policy that you rigorously adhere to, as the owner or executive officer you can set yourself up to be cajoled or hounded into granting a loan. At one company where I joined as COO, I had to wholly revamp the employee loan policy because the employees were clearly abusing it. Some employees even came to us before they turned to their savings accounts! Other employees had multiple loans out at one time. All of that was not good. Not good at all. So we changed all of that.

Clear, Strict Policy

If your company has the cash flow or can tap its line of credit, you may offer employee loans for special purchases, for example, houses, education, or cars. I personally know several companies (owners) that built a strongly loyal work force with programs like this. The companies all had a strict policy regarding use with clear guidelines so those who used the loans or considered using the loans always knew the parameters and expectations. And the money was always repaid through payroll deduction.

Unbiased Program Structure

Unless you specifically structure a program exclusively for senior management, there is another reason to be very clear about who qualifies for loans and under what conditions. If you lend money willy nilly, you can create an atmosphere of favoritism and bias, which could lead to lawsuits. Alternatively, your company’s actions could provide support for an employee in a lawsuit against your firm.

Take Action If Encounter Issues

If you do offer short-term loans not related to big purchases, track your employees’ usage of the loans. At the firm with the previously abused loan program, we implemented a financial training program. If a lot of employees are seeking loans (we had 28% who either had loans or wage garnishments!!), then you have an empowerment opportunity. You can educate your employees on how to responsibly manage their finances because, with statistics like that, it’s obvious they do not know how.

Offer with Financial Training

We engaged with credit counseling agencies to provide onsite financial training for free then provide one follow-up training session for free. Some nonprofit counseling agencies provide ongoing training in different categories for a low fee or on a sliding scale. If you live in or near a city with a population of 500,000 or more, you typically have numerous organizations to choose from. Therefore, finding a program that best suits your employees where a trainer will come on site won’t take  much effort.

Employee Loans – High Impact?

Providing a loan program, access to financial training and similar perks, when done effectively, can help you differentiate your company from its competitors. Listen to what your employees want and their complaints about the issues they face in their lives. You can offer programs and solutions that are relatively low cost but high impact. And it shows you care.