For an in-depth look at business
owners' exit strategies – from a business lawyer's viewpoint – see Phil
Glasscock's Continuing Legal Education outline on
Employment and borrowing relationships don’t mix.
Lending money to employees can cause many problems, including souring the
employment relationship. On the other hand, refusing to lend money to an
employee can inflict the same amount of damage.
Here’s how to respond when employees put you on the
spot and ask for “advances.”
Avoidance techniques. Lending to employees is full of danger. The loan
may be paid back late or not at all. Terms of the loan may be misunderstood. The
parties can stop communicating and the relationship can sour for all sorts of
So what do you do when you are approached for a
loan or an advance? Offer to provide information instead. Offer to take time and
discuss with the employee the need for the loan. Offer to help look for loans
from a bank, mortgage lender or elsewhere.
Consider offering the employee a gift. It’s
cleaner and easier. Further, you can justify offering the gift for a much
smaller amount than the employee is asking for as a loan. You can justify it to
the employee by saying, “That’s all I have to give right now.” Finally, after
you’ve made the gift, close the door to future gifts or loans. Tell the
employee, “Now that I’ve given you a gift, that’s all I have to give, so please
do not ask me again.”
Suggest borrowing from third parties. Explain to the employee that borrowing from an
unrelated third party might make everyone feel more comfortable than borrowing
from the employer.
If you do decide to make a loan … see an
attorney first. Some issues to discuss are written documentation, terms,
forgiveness of the debt upon termination of employment, and so on.