Considering Loaning Money to an Employee?

In November 4, 2016

There are many logical reasons why an employee might ask their employer when needing cash. First of all, quick options such as payday loans oftentimes come with steep interest rates and strict terms–which make people hesitant to seek out such services. Secondly, there is already a personal and a financial relationship established between employers and employees: you know your employee, and you know exactly what their income is. Finally, the employee’s job and paycheck create forms of collateral (even though we might not be inclined to think of them that way) that make the loan feel less risky for both parties.

All that being said, there’s a good chance that the thought of loaning money to an employee makes you a bit apprehensive. In this article, we will cover a few of the pros and cons that come with loaning an employee money. Hopefully, this information helps make your decision a little bit easier.

The Pros

Loyalty. Helping an employee out in a time of need is a great way to help instill loyalty-a value that is oft forgotten our day and age, yet still very valuable from an employer’s point of view.
Allowing the focus to stay on work. Financial troubles can distract from productivity and quality of work. Giving your employee the loan that they need can be a great way of helping them stay focused on the job at hand.
Helping your employee out! For many employers, part of the satisfaction of owning a business comes from knowing that you are helping your employees earn a living. Making a reasonable loan from time to time can create a similar sense of fulfilment.

The Cons

Loans can create tension. Your employee might stress and feel pressure because of the loan—and you may feel the same way! Such a sense of tension is obviously not conducive to an ideal workplace.
Loans could be grounds for a discrimination case. If you are unable to justify why you give loans to some employees and not to others, you may land in legal trouble.
Loans may be taxable. If you are charging your employee interest, then the income you are earning is taxable, just like other forms of income.

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