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Business Setting-Up a Lending Bank

 
 
CDobyns
 
Reply Fri 17 May, 2013 07:49 pm
Our organization is faced with the need to conduct a series of planned, one-day-week furloughs over a prescribed and limited period of time. We've explored an innumerable number of options to avoid these furloughs - but they now seem unavoidable.

One of the options that we've been asked to explore by our leadership is the possibility of establishing some sort of fund that would be contributed to by employees, and administered by the organization, and for the sole purpose of either loaning (or outright granting) funds to employees who demonstrate severe financial hardship, as a result of these furloughs. There seems to be a sense that a considerable number of our employees might be willing to contribute to such a fund - as they're a pretty altruistic group.

Among the many ideas we've brainstormed on, this one seems thoroughly half-baked. Since this would involve lending money to employees, either at low interest, or no interest, but would not involve company funds, this seems fraught with pitfalls, and seems to have a thousand unanswered questions. The biggest hurdle is whether the organization would be allowed to do this legally, since this seems to be a function that is very heavily regulated, either by state or federal banking laws, and isn't something you can just set-up over a weekend. Without much more details than this, does this sound like it is in the Good Idea or Bad Idea category?

Mostly I don't want to end up having to "do a nickel" after being convicted on a loan sharking rap . . .
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jespah
 
  2  
Reply Sat 18 May, 2013 05:04 am
@CDobyns,
I really, really, really think you need to stay out of the banking business. Pretty much everywhere in the world (I forget where you are), it is extremely heavily regulated.

That having been said, here are a few options.
1) Have a generalized leave bank, where people can donate a day or a few hours of vacation time to others. I have seen this done in organizations when a newer employee who doesn't have a lot of time saved up is suddenly caring for a sick family member, or is sick themselves.
2) Severance pay to those laid off.
3) This may be a can of worms you don't want to otherwise open up, but if the employees are unionized, there are usually union general funds that are set aside for workers who need them. I believe this would work similarly to #1.

But seriously, I strong urge you to not just loan money outright to employees. It muddies the water, big time, in the relationship between employer and employee. Do you give raises by rewarding people who pay off their debts on time, or do you give raises to those who don't pay their debts on time, hoping that they will? Do you retain employees who have outstanding balances because it's the only way you feel you'll have a claim on them and they won't flee the jurisdiction without having paid you back? Are the people who need loans seen as incautious employees? Would you allow a person who needed a loan to work in the department that gave them out?

Muddy, muddy, muddy.

Leave the banking to bankers.
CDobyns
 
  1  
Reply Sat 18 May, 2013 09:00 am
@jespah,
Okay, I make it a practice of never disagreeing with someone - especially when they're right.

In this response, jespah identifies only a handful out of the "thousand" unanswered questions, in fact most of the ones that we'd already discussed (and cringed over) internally. But first, a couple of quick clarification, to help anyone else who's predisposed to add to the response trail:

- None of our employees will actually be separated, they will simply have to forgo eight (8) hours of pay, one time per week (so no severance)
- None of our employees are in a union, so there is not another employing entity we could foist this idea off onto

So, we've already put in place, or discussed, much of these (especially the leave bank idea - in place now). But let me add to some of the speculative list of questions that jespah already started:

- How do we determine financial hardship (depending on how much/little I've over-indulged financially it might as easy [or hard] on me, as it would be on any other employee), so maybe more importantly - Who makes that decision, and if I'm on the "lending committee", can we approve loans to ourselves?
- How do I establish the interest rate? By the amount borrowed, the person's credit-worthiness, or hey, maybe by their performance rating at work (another interesting idea)
- What about the funds that employees contribute for lending purposes, do they receive any interest on that money and could they pull it back if they chose to (this conjures up images of the Bailey Building and Loan, but in this case, it's probably not A Wonderful Life)
- And yes, if these are loans, what do we do if someone defaults? Fire them? Or give them a raise so they can pay back the loan, and if they get to keep the raise forever, wouldn't people purposely default - just to get a raise?

Okay, I would invite more input, but just this handful of questions/answers - in addition to my aversion to having to do "a stretch" at a minimum security federal prison, seems to be positioning this proposal in the Bad Idea category so far.
jespah
 
  2  
Reply Sat 18 May, 2013 02:47 pm
@CDobyns,
Then keep cringing. Your guts are telling you that this is a crappy idea. Listen to them.

Determining financial hardship? Will you visit homes? Peek into bank accounts? Interview employees? Observe their diets and entertainment programs to make these recommendations? Again, muddy and slippery.

BTW, interest rate maxima are set by the state if you are in the US, and are likely set by governments if you are not. That does not necessarily set minima, but here in the US, tiny interest rates can muddy the waters between gift and loan, and between company benefit and loan. And, again, it should be mighty cringeworthy.

Here's the deal - you are putting employees on short unpaid furloughs when there is no work. They are laid off for short periods, much as would happen in seasonal employment (e. g. if you were running a ski resort or a summer camp, but you had permanent employees, as opposed to temps). Or, you are reducing their hours from 40 to 30 or 32 or whatever you call Fridays (or whatever day) off. Then call it either of those and stop talking about loans or calling any of it loans.

You put people on furlough or reduced hours. And it will be a hardship, truthfully, for all of them, albeit to differing extents. Some people can be brought back from furlough or reduced hours earlier than others, and then they can be paid normally, like employees, because that's what they are, and would be. And drop the loan idea like a bad habit.
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Miss L Toad
 
  1  
Reply Sun 19 May, 2013 04:25 am
@CDobyns,
Quote:
over a prescribed and limited period of time

Quote:
asked to explore by our leadership


Instead of cracking a nut with a sledge hammer dire straits need a quick whip around.



CDobyns
 
  1  
Reply Thu 30 May, 2013 09:10 pm
@Miss L Toad,
Definitely in the "better late than never" column, our General Counsel recently weighed in on the all-too-obvious folly of our business establishing some sort of lending organization, for the benefit of our employees. Here's a little of what they provided, which while stated much more eloquent than my original response, still sounds like this idea falls squarely in the Bad Idea column:

- A volunteer person (acting solely in their own capacity) or a private organization, could pursue fundraising for the benefit of the larger group
- Ideally, this private organization should be already established, rather than set-up a new one, which would require the services of an attorney - which would not include anyone from the General Counsel's office
- The private organization must conduct fundraising and gifting of funds completely independent of the company
- The private organization may not use the company name, logo or seal
- Company employees, even in their private capacity, may not fundraise from private companies, where any existing business relationship exists, or where any other conflict of interest might apply
- Members of the private organization who are not company employees could fundraise from private companies, as long as not using the company name
- All donations must be purely voluntary
- This must a private venture and have as little to do directly with the company as possible

So, I don't think we'll be going into the banking business anytime soon (thankfully).
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