Microloans: Why You Should Provide them to Employees
Everyone knows that business owners have many roles, but most people don’t realize one of them is being a lender. Sometimes employees might be hit with an unexpected financial burden which they do not have savings to cover. By offering your employees microloans you can help your employees alleviate their financial stress and prevent them from having to turn to predatory lenders. Offering microloans also adds to your employees’ financial wellbeing, ensuring their continued productivity and engagement.
What is a Microloan?
A microloan program is a small, short-term loan which typically has a low-interest rate or no interest. Many employers offer their employees microloans ranging from anywhere between $500 and $3,000. Generally, as an employer, you are free to make loans to employees for any purpose. They are often offered as an added employee benefit.
What Are the Advantages of Microloans for Employees?
Offering microloans can actually have benefits for your business, such as
- Alleviating employees’ financial stress can make them more productive since they no longer have to worry about their financial burden.
- Offering financial assistance is a good way to strengthen loyalty and boost morale throughout your company.
- Giving employees microloans can boss your business’ reputation as a company who cares about their employees.
- Helping employees financially improves employee retention and decreases turnover.
What are the Possible Pitfalls of Microloans for Employees?
Unfortunately, providing employees with microloans can have its pitfalls, so you should be aware of them before you begin a lending program. These include:
- Employees may not make loan repayments on time.
- An employee may make frequent requests to borrow an increased amount.
- An employee may leave your company before the loan is repaid.
How Can an Employee Qualify for a Microloan?
You can make application forms available to all employees through your HR department. Employees may be struggling financially for a number of reasons such as:
- Unexpected medical bills
- Home or car repair
- Birth of a child
- A reduction in family income
Offering employees microloans is a much better solution than having them resort to borrowing money from predatory lenders. However, it is important that you judge carefully whether or not the employee will be able to pay you back. Almost 1 in 5 American adults have no money set aside to cover an unexpected emergency. To make the most of your employee microloan system, you should examine each loan request carefully.
Setting Out the Guidelines
If you decide to set up a microloan program for your employees, have the borrower sign a promissory note for the repayment of the loan. The note should clearly state the terms of the loan these should include:
- The frequency of repayment
- Repayment amounts
- Interest rates
- What will happen if the borrower defaults
Make sure you carry the employee microloan on your books so that the loan repayments are not reported as income.
Are Microloans the Best Financing Option?
Microlending is not without its pros and cons:
- A good alternative lending option
- Loans can be borrowed in small amounts
- Can contribute to building a positive credit history
- Can help people who are having a financial crisis
- Microloans have limitations
- May not offer as much as an employee needs
- Interest rates can vary
There are many aspects of microloans which can benefit employees greatly. These include:
- Motivation: As a microlender, your company’s main goal is to help employees who are unable to borrow from a traditional lender. This motivates employees to borrow money from the company rather than turning to a predatory lender.
- Loan size: Most traditional lenders have no interest in offering microloans because they are so small, and it costs them too much to evaluate a borrower’s credit history. This is not an issue for a company offering microloans to employees.
- Borrowers: Employees who take out a microloan are typically people who are up against a financial burden such as unexpected medical bills or house or car repairs. Typically, a microloan borrower does not have a financial safety net to cover the unexpected expense. Nor are they able to borrow money from a traditional lender.
Microlending isn’t just about making money; it is about helping employees who are in dire financial need and who are prepared to work hard to repay the loan. Offering your employees microloans is a great way to help reduce their financial burdens and protect them from predatory lenders. It will also strengthen the bonds of loyalty between management and employees because your employees will know that you are there to help them with their lives outside of the workplace.