Read this before considering employee loans

Being an employee means that you wear more than one hat. You could be a manager, a leader as well as a lender. You should, however, put some things into consideration before wearing the third hat. Lending your employees some forms of loans may be beneficial to your business. It helps you build loyalty from employees and lifts their morale. You can also attract new stuff willing to work for you wholeheartedly through giving employee loans since it boosts your reputation.

t also alleviates financial stress among your employees thus, increasing their productivity due to the elimination of money problems. Lending employee loans can also reduce the turnover and help you retain your employees for long without the fear of job hopping. Though you can gain all these benefits from lending employee loans; you must remain open-minded about potential challenges and use the right criteria in the lending process.

Before offering the loan, you should try to understand their needs to determine if they are valid or not. An employee could be facing an emergency and borrow once. Such could be viable for a loan compared to a habitual borrower who lives without a budget. You may have transferred an employee to another branch in a different place, and they may need to move. You can consider giving such an employee a home relocation loan to cover for their expenses. Such a need is valid for a loan.

You should also set expectations before disbursing employee loans. You must look at how the loan may affect your business and therefore protect it first. The lending arrangement should be formal in that you can establish guidelines that outline the lending program. This will control your employees from asking for a loan simply because you have given a fellow employee.

The employees should also sign a promissory note that pertains all the loan details such as how they have borrowed as well as the repayment terms. Include the frequency of making payments in the promissory notes to give them a time frame as to how they should repay it and set deadlines. Also, be clear on what could happen if they don’t pay the loan.

Keep a record of the employee loans so that you can monitor repayments. This record should go into your books so that nobody confuses them with your business income. The interest rates that you charge on employee loans should be in line with applicable federal rates. The IRS sets interest rates monthly and setting interest rates accordingly prevents your business from high taxes.

It is normal to have a personal connection with your employees especially if you are running a small business. You should, however, draw the line so that they don’t take advantage and affect your business negatively.

In a case where you think an employee is not liable to receive a loan, you can offer them a pay check advance instead. This can still help them handle emergencies without worrying about paying it back since the advance is part of their salary. They can also spend it better than the loan knowing that they will receive less salary at the end of the month.

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