Many small business owners lend money to staffers who are short of cash before payday or who have unexpected expenses or crises. The risk bosses face is not getting paid back.
Marcelo Melamed made several loans to a staffer who said he needed cash for things like fixing his car. Then one day, the staffer disappeared and left behind a debt of nearly $800. Helping staffers is important to Melamed, owner of Stor Furniture in Old Bridge, New Jersey, but, he says the experience taught him, “you have to be careful.”
There can be other issues that arise from lending money to employees. Owners may be willing to lend to employees to help with big purchases like new cars, but not for a vacation, angering some staffers. And unless they stipulate how they expect to be repaid, owners may find themselves waiting and wondering about the staffer’s intent and plans.
Many owners deduct money from staffers’ paychecks until the loans are fully paid off, eliminating the uncertainty as long as the employee stays with the company.
Matthew Ross, co-owner of Slumber Yard, a mattress review website and YouTube channel, and his partner Jeffrey Rizzo recently gave a longtime employee a $15,000 loan to buy a new vehicle. They’ve also lent another staffer $10,000 for a down payment on a condo. The loans are interest-free and payments are taken out of paychecks.
“It’s a big financial risk for my business partner and me but we feel like keeping our employees happy is one of the best things we can do for the overall health of the business,” says Ross, whose company is based in Reno, Nevada.
At this point, with 12 staffers, there’s no formal, written process for loans at Slumber Yard. But as the company grows, it may need one, Ross says.
Owners should think about the reasons they’re willing to loan money — such as hardships or essentials like cars and homes. And, what constitutes a hardship. Creating a written policy can help a company prevent complaints and resentment when one staffer gets a loan, for example, for medical expenses, but another can’t get a loan for a trip to the Caribbean.
What if the staffer with a loan leaves and there’s an unpaid balance? The owner could face a loss, says Rick Gibbs, a consultant with the human resources provider Insperity.
“Recovering money is difficult with most labor laws,” Gibbs says.
Some owners might want to help their staffers but are reluctant to lend them money. An alternative is to help them find financial resources, Gibbs says. He noted that some Employee Assistance Programs include services to counsel staffers who are short of cash or struggling with unpaid bills.