Monday, August 18, 2014

Small Business Owners Lending Money to Employees - Good Business Sense?

Every year, business owner Jim Fab lends his 25 employees as much as $4,000 interest-free for personal expenses they can't afford up front, ranging from down payments on homes and cars to funeral and legal fees. Most pay him back – eventually.

"I had a guy send me $300 a month for three years after he quit," says Mr. Fab, whose electrical-contracting company, Fab Electric Inc., has been in operation in Gaithersburg, Md., since 1978.

At small, closely knit companies, business owners like Mr. Fab sometimes take on an extra role: that of the parent who opens up the wallet when the kids need cash. After all, they typically can't steer their penny-pinched workers toward the kind of resources that many big companies have, such as credit unions and debt-counseling programs. Instead, the only option they usually have is to dig into their own pockets – and many say they do with little hesitation.

"It's normal," says Laura J. Wellington, co-owner of Giddy Gander Company LLC, a Ridgewood, N.J., provider of educational media content for children. Entrepreneurs often develop close ties with their staff members given they have so few, she explains, adding that's why she's felt comfortable loaning her 12 employees around $10,000 over the past two years. "I know my employees exceedingly well," she says, down to their spending habits. "If the person is credible and there's good reason to give out the loan, then I will do it."

These days, more workers may be prone to asking for financial support, as they're more likely to be the only members of their households earning an income. A report released earlier this week from the Labor Department shows that the share of families with an unemployed member rose to 12% last year from 7.8% in 2008 – the highest level since the government agency began collecting such data in 1994.

There's no firm statistics on how many small-business owners lend money to staff. But those who frequently engage in the practice say it makes good business sense. One reason, they say, is that it can help prevent a slowdown in productivity because workers who are stressed out about money may have difficulty focusing on their jobs.

Another rationale for helping employees overcome financial hardships is that it can boost loyalty, morale and unity within a work force, says Elie D. Ashery, co-founder of Gold Lasso Inc., a software company also in Gaithersburg that's given out loans to its 10 employees of up to $3,000 each. "Sometimes they're living paycheck to paycheck so we regularly go out of our way to help our employees keep their family obligations," he says. "It really helps to create better cohesiveness."

Offering financial aid to employees also can enhance a company's reputation, adds Shaun Burwell, chief financial officer of 2HB Software Designs Inc. in Columbia, Md. The systems-engineering firm has loaned its 17 employees more than $50,000 over the past five years, he says, and many recipients have shared that fact with family and friends. "It has been a positive discussion point," he says.

Certainly, there are potential downsides to lending workers money, such as the possibility of never getting paid back. For this reason, some owners say they only give out amounts they could live with losing for good. Others require workers to provide some form of collateral, such as the title to a car they own, or arrange to withdraw payments directly from their paychecks.

But John A. Snyder, a partner with law firm Jackson Lewis LLP in New York, says arranging for employees to pay back loans through salary deductions can have legal consequences. "You have to be careful about violating wage laws, especially if any deductions could potentially bring the employee below minimum wage," he says.

Mr. Snyder also warns that owners could be sued should they opt to give out loans to some workers but not others. "Whatever policy they have should be implemented in a uniform and nondiscriminatory way," he says, adding that it should also be put in writing and signed off on by an attorney.

Employee loans don't need to reported as income to the Internal Revenue Service since they're designed to be paid back, unlike monetary gifts, which are considered compensation, says John McQuaig, founder of McQuaig & Welk PLLC, a public-accounting firm in Wenatchee, Wash. But for safe measure, he urges business owners to record every loan they give out to employees on paper, including details on how it should be paid back and by when, and have them sign it, he advises.

Meanwhile, owners should consider the possibly that lending money to employees will create an awkward work environment, warns Christopher Carey, a small-business adviser in Brooklyn, N.Y. He says some might find it uncomfortable to inquire about late payments as well as embarrassing for the recipient, particularly in a small firm where other staffers might be within earshot. "It can cause undue stress," he says.

It's also possible that some workers will make a habit of asking for handouts, adds Mike Faith, founder of Inc., a retailer in San Francisco with 55 employees. "It could become a norm or expectation," he says. "It's got to be for a one-off event rather than just giving them money to feed bad spending habits."

But the bottom line, says Mr. Fab, the electrical-contracting company owner, is that there needs to be a high level of trust and respect between everyone involved to ensure a positive outcome. "It's not a good practice to get into unless you have a personal relationship with your employees," he says.

As long as that's the case, Mr. Fab doesn't see much of a need to worry. "You're the guy who signs their paycheck," he says. "They're going to pay you back before anybody else."

Source:  Wall Street Journal - June 4, 2010

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