Personal Insights About Lending Money to Employees

Sarah Needleman, a reporter for the Wall Street Journal, recently wrote an article about small business owners who lend money to their employees. The article notes that entrepreneurs generally develop close ties to their employees in these small, close-knit companies. Therefore, it's not all that unusual for them to go above and beyond the call of duty to help their employees bridge a financial gap or cover unexpected expenses.

In my own experience, I would lend money occasionally to my employees at my former restaurant business, Dessert Noir Café & Bar, to help them "get by" until their next paychecks – e.g., gas money, groceries, school expenses, family obligations. After all, for a service-oriented business where the workers are typically low-skilled and are just barely getting by on their salaries and tips, it didn't take much for a financial issue to really throw my employees for a loop. And for the most part, I was happy to help, for I knew my employees very well and trusted that they were being open and honest with me about their financial issues. Also, they were always quick to pay me back, and I never had to resort to drastic measures for them to keep up their end of the bargain.

However, in 2006, I lent my restaurant's chef/general manager a significant sum of money for his defense in a child custody case with his ex-wife. Because he could not afford the attorney on his own at the time and he was a dedicated employee, I wanted to ensure that he had some "peace of mind" as he was working through this legal issue at the same time he was focused on running my restaurant. Also, he was managing a team of employees, and I wanted to ensure continuity in the operation.

Well, this was a "retention strategy" gone bad. I was always very clear with this employee that the money was NOT part of his wages or a bonus, but rather it was a loan that needed to be repaid. I was flexible on the payment terms, but we agreed that if he terminated employment with my company, the loan would be due immediately. In 2007, when he left my company to pursue employment with another restaurant away from the area, I informed him again of his obligation to repay the company the loan for his legal fees. Unfortunately, he felt no obligation to repay this loan, and I had to sue him for the money, which amounted to nearly $11,000 plus court costs, fees, and interest.

When the court awarded my judgment against this former employee, I worked with my attorney to contact his new employer to attempt to garnish his wages. However, he was not making enough money at the time for me to pursue my claim. Since then, he's "gone off the grid" and I have now hired a collection agency to pursue recovering this judgment on my company's behalf.

To wrap up here, a few pros and cons of lending money to employees:

1. Pros:
   
   1. As an employer, you have an opportunity to help an employee through a difficult period, assuming it's a temporary situation, and you can ensure that the employee remains highly engaged in his work. This could help with ensuring your operation stays on track and employees deliver the results that you're expecting.
      
   2. Employers can set a good example that he/she is dedicated to the business and invests in his/her employees. This can have a positive impact on employee morale and instill loyalty to your business and your customers.
      
2. Cons:
   
   1. As I noted above, it's very difficult to collect these debts if the situation "turns for the worse" and the employee fails to meet his/her obligation. Therefore, it's best to lend money that you can "live without" in case you never see it again.
      
   2. Employers can risk "crossing the line" between business and personal if they are too concerned or too wrapped up in their employees' lives and wanting to "fix things" for them. I think as entrepreneurs, we tend to be "doers," and if there's a problem, we try to come up with a solution, especially if the problem is having a direct impact on the success of our businesses.
      
   3. In these situations, business owners can inadvertently create a culture of dependency within the organization. Employees become free to approach you for financial assistance first before seeking out others who could step in, like their friends and family. In my case, I was clear with my employees that I was the "lender of last resort" after they exhausted all other options.
      

Every business owner and individual employee's situation will be different. My advice: Know what you're getting into before you decide that extending loans to your employees is a good thing for you and your business. Ensure you have a clear understanding about the terms of the loan and your expectations about getting repaid. You'll certainly be better off for having been clear and direct.