Pros and Cons of Offering Employee Loans Program

The advantage of offering employees loans shows the employees that the company cares about them; the employee loan program encourages employee loyalty and retention. The disadvantage of an employee loan program includes the higher business expense for administrative costs and the risk of unpaid loans.

Author: Brad Nakase, Attorney

Email  |  Call (888) 600-8654

What is an example of an employee loan program?

Bernard is the owner of a company that sells computer software. One day, an employee comes to him in tears, explaining that an expensive divorce has resulted in him living paycheck to paycheck. His rent is due soon, and he cannot afford it due to his car breaking down. Desperate, he asks Bernard for a loan. Feeling sympathy for his employee, Bernard decides to start offering employee loans, where he himself will grant money to individuals in his company who are in financial distress. However, Bernard is not sure whether to offer the loan himself or hire a third party to do so. If the employee cannot pay back his loan on time, that could lead to an awkward situation resulting in Bernard losing his money. Before making a decision, Bernard looks at the different types of employee loans he may offer, as well as the pros of cons of doing so.

What Are Employee Loans?

Unfortunately, it is a common for many Americans to be living paycheck to paycheck. This is worrying not only for the individuals who fear running out of money, but also for the U.S. economy at large. Recently, the situation has only become worse, with 63% of American workers being one paycheck away from financial trouble.

With this many individuals at risk of financial hardship, employees are able to ask their employers for a loan. Traditional employee loans are subject to a number of complications, especially for the employer involved. That said, there is another form of employee loan agreement offered by a third party that reduces the complexity of the situation.

Of course, no employee loan comes without costs and benefits worth serious consideration. So, it is a good idea for an employee to understand these pros and cons before making any big decisions.

This article will review the definition of employee loans, as well as this type of loan’s advantages and disadvantages.

First, let us discuss what employee loans are.

There are two kind of loans which are commonly referred to as ‘employee loans.’ The first type of loan occurs when an employer lends money to one of their employees. The employer is responsible for setting the terms and conditions of the loan, which can vary greatly according to the employer and the situation. But, similar to a traditional loan, the loaned amounts tend to come with an interest rate attached. Also, they demand as fixed repayment schedule.

The second type of employee loan involved a third-party lending money through an employer’s benefits to an employee. Some companies that provide this service include and TrueConnect.

When Are Employee Loans Given Out?

Employee loans are generally offered to employees who are suffering from financial difficulties or who need to pay for emergency expenses. The specific situation can differ depending on the employer and employee. If an employer chooses to offer employee loans, they tend to create policies that establish which situations warrant a loan.

What Are the Pros of Employee Loan Programs?

  1. This Kind of Financing Can Benefit Employees

For an entrepreneur, one of the best things about running a business is the ability to provide economic opportunities for others. In that regard, employee loans can help a business owner’s employees get through a difficult time in their life. Offering a loan to an employee in need can be very rewarding for an employer, even if all they get in return is their loan repayment.

  1. Can Help Attract Employees

When a business offers employee loans as a benefit, this can attract prospective employees. It is therefore a powerful tool for recruiting new workers. Also, it signals to prospective employees that the business owner cares about the people who work for his or her company.

  1. Can Help Improve Productivity

More and more research has shown that financial hardship negatively affects worker productivity. Naturally, this makes sense, because time spent stressing about money means poor mental health and less motivation. Financial assistance can help reduce the burden on employees.

What Are the Cons of Employee Loan Programs?

  1. Time-Consuming to Give Out

If an employer decides to create an employee loan program, then it is important he or she knows how to structure the program correctly. If this is not done properly, then a business owner can expose themselves to tax and other liabilities.

Employee financing needs to be well documented, which means that offering this kind of loan results in administrative headaches. Then again, if a business owner decides to use employee loans via a third party, then the administrative workload can be reduced significantly if not removed entirely.

  1. High Risk of Loss

If a business owner lends money to an employee and the borrower does not pay it back on time or in full, then it can be difficult to collect the balance. It is illegal to force repayment using tactics such as wage garnishment. It would also not be worthwhile taking the matter to court, because the court expenses will end up costing more than the value of the loan.

This means that if an employee fails or refuses to repay the loan, there is not much an employer can do. Third-party loans reduce the risk an employer takes on, however, because the third-party is responsible for collecting loan payments.

  1. High Opportunity Cost

When a business owner offers employee loans, he or she promises to devote time and money into a project that may result in money lost. It also means that the owner is taking time and money away from growing his or her business. Thus, employee loans have a high opportunity cost for employers.


Before a business owner decides to lend money to his or her employees, they should think about alternatives. If an employee is in financial trouble, then perhaps their employer could offer a paycheck advance or a third-party loan.

A paycheck advance gives money to an employee earlier than usual to cover a shortfall. This is a great alternative to a loan because the business owner’s risk is limited to the value of the advanced paycheck. Also, third-party employee loans reduce employer risk while getting money to employees who need it.

If an employer decides to offer employee loans, then he or she should be sure to consider the risks, as well as the various alternatives available to them. The decision is not one to be taken lightly.

Please tell us your story:

0 + 1 = ?

See all blogs: Business | Corporate | Employment

What is profit formula and how to calculate profit formula?

A business profit is revenue minus expenses. The profit formula in accounting calculates the net gains or losses incurred by the business for a period by subtracting the total expenses from the total income: Total Income – Total Expenses - Profit

What is invoice reconciliation?

Invoice reconciliation is the process of matching bank statements to incoming and outgoing invoices. The purpose of invoice reconciliation is to confirm that the data entry is correctly matched with every invoice.

What Makes a Verbal Contract Valid

A verbal contract is valid when contractual elements are satisfied, such as evidence of an offer, acceptance of the offer, and consideration which is an exchange of value between the parties.

Marketing Transport Company

The easiest way of growing your list of clients is to schedule a meeting with businesses that do a lot of shipping and introduce your transportation company. Then, engage an internet presence to market your transportation business.

What Can You Do with a Toxic Business Partner?

A bad partnership could lead to profit loss and toxic company culture. The first way of dealing with a toxic business partner is to schedule a meeting to discuss your concerns calmly.

Disruptive Business Model

Disruptive business models are disruptive innovations that bring new business ideas or technology to existing markets. A disruptive business does not fit the profile of a standard business model. Amazon is considered as one of the world's most disruptive companies.

How to Get a Business Loan with Bad Credit

For small business owners with bad credit, the easiest place to get a business loan is with the SBA. Although not easy, entrepreneurs with bad credit can get a small business loan.

How to Get a Small Business Grant

You can get a small business grant from the Small Business Administration. Also, check your local government for small business stimulus grants.

Pros and Cons of Etsy

Etsy Pro: Your products are given a large audience, and you easily sell your merchandise. Etsy Cons: You can only sell handmade or vintage merchandise, and there are many competitors.

What is a Breach of Contract in California?

A breach of contract in California arose when a party to a contract failed to achieve a legal duty the contract created. When a party to a contract fails to fulfill the terms of a binding contract, they are liable for damages for breaching the contract.

Business Equipment Leasing Pros and Cons

One advantage of equipment leasing is that you don’t need to come up with all the cash to buy the equipment. One disadvantage of equipment leasing is higher overall costs than outright purchasing the equipment.


The main difference between an LLC and a DBA is that an LLC is a business entity, and a DBA is a registered fictitious business name. Sole proprietors, general partnerships, and LLC can register for a DBA.

What is an LLC and how does it work

An LLC is a business entity that protects the owners with limited liability protection. An LLC also offers pass-through taxation, which means the company’s profits and losses pass through to the owner’s personal tax level.

What Is a Disregarded Entity?

A “disregarded entity” refers to an entity with one owner and not organized as an entity such as a corporation, LLC, or partnership. For federal tax purposes, the disregarded entity and the owner, who is a natural person, are not treated separate.

California Breach of Fiduciary Duty

A fiduciary is a professional person who owes a legal and ethical responsibility to another person. Examples of people with fiduciary duties are lawyers, financial advisors, corporate officers, corporate directors, etc. A breach of fiduciary duty occurs when the professional person fails to do what was legally and ethically required of them.

List of 12 Biggest Business Startup Costs

It is a good idea for every entrepreneur to consider the costs associated with starting their business. Financing is stressful, but estimating startup costs goes a long way to ensuring a business succeeds.

Is it legal to sell homemade food in California?

California is one of the only states to allow individuals to sell homemade meals, including meals that contain meat. So long as you have California required permits and licenses, it is legal to sell homemade food in California.

10 Tips on How To Start A Food Truck Business

Running a food truck business is an exciting and trendy opportunity for any entrepreneur with a passion for food. If a business owner chooses the right financing options and follows the above tips, then he or she has every chance of success.

What is a demand letter?

A demand letter is a letter that is commonly written by a lawyer on behalf of a client setting forth facts supporting a demand for money. A demand letter is usually the first step in resolving a dispute between two opposing parties.

What is working capital cycles?

In business, a Working Capital Cycle is the period that a company waits to receive payment to create available cash. A long cycle means tying up capital for a longer time without earning a return. Short cycles allow your business to free up cash faster.

What Happens When Business Partners Disagree?

Before going nuclear, when business partners disagree, the partners should talk about how to move forward. If talking fails, the partners may discuss a buy-out. However, if there is wrongdoing by one business partner, a lawsuit may be an option.

Bank Statement Business Loans

A business bank statement loan lender relies only on the company’s bank statements to qualify the borrower.

How to Prove a Verbal Contract

To prove a verbal contract is by getting witnesses to testify that the agreement was made. Also, proving a contract existed can be supported by documents such as receipts, invoices, delivery, statements, text messages, and emails.

What are business performance metrics, and why it is important?

Business performance metrics is a quantifiable measured value that shows the company’s progress and growth. Business metrics track the business progress and performance. A quantifiable measurement may include customers, revenue, and profits.

Is Sabotaging a Business Illegal?

Yes, sabotaging a business is illegal regardless of who is saboteur, e.g., business partner, competitor, family member, or customer.

See all blog: Business | Corporate | Employment

© Copyright | Nakase Law Firm (2019)