Lending A Hand

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Lending A Hand

Should You Help Employees Out Of A Financial Jam?
By Phillip M. Perry

Diane Parker expected to pay for her new home with the funds received from the sale of her previous one. Suddenly the sale of her first house fell through, creating a serious cash squeeze.

Common problem, right? What’s not so common was the solution. Parker’s employer lent her $30,000 as a bridge loan until she could resolve the issue. That event happened 16 years ago, but Parker never forgot her employer’s benevolent act.

“It was one of many things that made me feel good about being employed at this company,” says Parker, who is now executive office manager at the same employer, Stemilt Growers in Wenatchee, Wash.

As that story shows, employer loans can be beneficial not only for the employee, but for the employer, too.

“Making a loan to an employee in trouble buys a tremendous amount of loyalty,” says John McQuaig, managing partner of McQuaig & Welk, a management consulting firm in a Wenatchee, Wash. “The individual will talk about it for years.”

But there are also risks when offering loans to employees. Weigh the pros and cons before you lend a financial hand to employees.

Know When To Lend
A broken transmission. A medical procedure. A legal bill. Any number of unexpected expenses can throw an employee’s budget out of whack.

And money troubles often impact workplace performance.

“Productivity can be affected when employees bring their financial burdens to the workplace,” says Ann Parker, chief operating officer for the Small Business Association of Michigan. “This happens for many reasons. Worry and mental stress can distract people from their duties. Or they may use work time to make personal calls to set up payment schedules, or try in other ways to solve their debt issues.”

Helping a troubled employee, then, is smart from a business standpoint. And it’s an acknowledgement of our common humanity. But what, exactly, can an employer do?

Extending money is the most direct of a number of solutions.

“For a good employee, it is in your self-interest to take reasonable steps to resolve a mental distraction and bring him or her back up to full speed,” says Ian Jacobsen, president of Jacobsen Consulting Group in Sunnyvale, Calif. “Sometimes a loan from you, if you can swing it, is what will make the difference.”

Loans should not be made casually. They will do the most good if the employee’s financial crunch is truly short term.

“The first thing is to make sure there is a clear assessment of where the employee is financially,” says management consultant McQuaig. “You may want to limit loans to only those employees who cite well-defined needs. For example, maybe a spouse lost a job, and the couple is in a temporary bind right now. Or maybe they have a reasonable plan for downsizing but need a loan until they can sell their two cars.”

Establish Lending Policies
Once you decide to make a loan, do the paperwork.

“Proceed as if you were loaning to a person you do not know,” advises Marilyn J. Holt, a Seattle-based management consultant. “Have a written agreement as to the payback period.”

The more you make the arrangement reflect a structured financial obligation, says Holt, the less the chance of misunderstandings. That means less pain down the road.

“If you have good employees and you want to keep them, you want all of your relationships to remain clean.”

Make one loan to an employee—good. Turn your business into a small bank, lending people $500 or $1,000 every few weeks—not so good. That can happen when other employees hear about your loan. And they will, no matter how hard you try to keep it quiet.

You can avoid resentments—and charges of favoritism—by establishing firm loan policies.

“You don’t want to look as if you are playing favorites,” says Parker of the Michigan association. “Maybe you see one emergency as more serious than the next—but the second employee may not see it that way.”

Consider setting up a list of emergencies that will qualify for a loan, suggests Parker.

“And maybe you want to establish a cap on the number of loans any one employee can get in a year. Make all of these things very clear upfront to avoid the risk of confusion or animosity.”

Explore Alternatives
Loans might be called for in well-defined, short-term financial crunches. But avoid loaning money to resolve systemic difficulties.

“You can get into trouble putting a Band-Aid on something and not fixing it,” cautions McQuaig.

An employee’s systemic financial problem can result from long-term lifestyle issues. McQuaig cites a recent example: “I just spoke with a couple where the spouse spent a lot of money on credit cards over the years. They now have about $50,000 in debt and their home equity is slim,” he says. “They are both in their 50s, their bonuses have dried up, and they are looking at 10 years to pay off the debt.”

What to do in such a case? Pitching in with some monthly payments will not really help their situation, points out McQuaig. “A loan in situations like this one can totally backfire.”

Sometimes bankruptcy, followed by a period of rebuilding, is the best solution. The employee with substantial assets, though, may be better served by debt counseling. Again, here is where an employer can help.

“I have seen many instances where employers offer to pay for meetings with counselors,” says McQuaig. “That might be a good perk to offer your staff.”

Here are some other approaches to consider:

  • Third party loan. Got a good relationship with a banker? See if you can get a bank to make a loan to your employee. This option relieves you of the responsibility of collecting and avoids possible resentment of a cash-strapped employee who cannot repay his loan to you later on.
  • Direct deposit of salary. This is a way to lessen the chances that minimum wage employees will get into trouble in the first place. Direct deposits avoid the hefty percentage cuts taken by the cash advance vendors used by some workers.
  • Financial planning. Just as some employers bring in debt counselors for meetings with employees, other companies bring in financial planners who can help workers learn to budget and save for emergencies.
Don’t Ignore The Issue
If you haven’t yet faced the challenge of helping an employee with a cash crunch, chances are you will at some point.

“Today, with the economy being what it is, I suspect there will be more instances of financially-strapped employees,” says management consultant Don Schackne, who’s based in Delaware, Ohio. “A lot of people are living paycheck to paycheck.”

But does that mean you should lend money to your workers?

“The decision is a real tough one,” says Schackne. “You can easily see both sides of the coin.

“The easiest thing to do is say ‘Sorry, this is not our problem to solve,’” says Schackne. “But I recommend facing up to, and dealing with, the tough ones. Because quite honestly, this can happen to anyone.”

New York City-based writer Phillip M. Perry tips his hat to micro-business owners who care for their employees.

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