What is an employee loan agreement? (With employee load agreement template)

Alisa Mistry -

As a small business, the idea of loaning someone on your team money might seem unlikely. But the truth is that it’s something you need to be prepared for. Because an employee is possibly more likely to approach their employer for a loan in a small business setting than in any other.

Small businesses tend to be close-knit, and have a very different working dynamic to their big business counterparts. Their very nature means that the founder or CEO isn’t separated from their team by layers of leadership. You’ll likely know each of your employees by name, and have probably been directly responsible for employing most if not all of them. 

The closeness and level of trust means that an employee who’s struggling financially might feel more comfortable coming to you for help. So you need to know how best to support them in what’s an otherwise embarrassing and stressful time. 

Now of course, you’re under no legal obligation to assist anyone in your team who’s experiencing financial difficulty. Loaning an employee money is entirely your choice. What is important, however, is that you’re consistent in how you respond to all employee loan applications and avoid allegations of unlawful discrimination. 

And that’s where employee loan agreements come in.

As a Charlie’s HR advisor, I spend my days giving small businesses and startups the best possible people advice. And that includes writing up employee loan agreements. 

So to make a complicated scenario a little easier, I’ve included a free employee loan agreement template for UK small businesses with this blog. You can save this employee loan agreement template and edit it in whatever system you use, whether that’s Word or Google. 

But before that, let’s make sure we’re all on the same page regarding employee loan agreements and why you might decide to use one.

What is an employee loan agreement?

An employee loan agreement is a document that sets out the terms and conditions of a loan between an employer and an employee. 

An employee loan agreement is most often used when an employer is loaning or has loaned an employee money, usually as an advance on their salary. 

Employee loans provide extra support to team members in financial difficulty. Loans like this tend to be interest-free, as it’s likely that the employee in question has not been able to secure financial aid from other sources.

The employee loan agreement details the terms and conditions of the loan, including repayment (how it should be repaid and by when). The loan agreement should clearly document the obligations of both employer and employee to ensure transparency, and avoid future confusion or friction. 

In order to be binding, an employee loan agreement must be signed and dated by both parties. 

Who sends an employee loan agreement?

An employee loan agreement is sent from the employer to the employee. 

Why should you have an employee loan agreement?

All employers should document loans to any of their employees in writing. It’s custom and practice for an employee loan agreement to be drawn up before any money has been transferred over. 

This is because the employee loan agreement is effectively a contract between the employer and employee. It clearly sets out the conditions of the loan — how much it is for, potentially what it is for, and how it will be paid back — so that both the employee and employer are fully informed and in agreement. 

Having an employee loan agreement template drafted up and ready means that you’re prepared as a small business for loan requests from any of your employees. This is worthwhile for several reasons:

  • You won’t be on the back foot, and can respond to loan requests in a timely manner (in these sort of situations, an employee is likely to already be anxious or stressed)
  • You’ll have terms and conditions in place to ensure equal and consistent treatment of everyone in your team — which is important because employers cannot be seen to treat one employee more favourably than another. 

How to write an employee loan agreement (i.e. What to include in an employee loan agreement)

Regardless of the amount or the reason for the loan, every employee loan agreement must include the same basic information: 

  • Name and address of the employer and the employee
  • How much is being loaned
  • Terms of the loan
  • Rate of interest
  • Terms of repayment 

Typically, an employee loan is repaid through deductions in pay in set monthly instalments (usually over no more than 12 months). And employee loans are commonly capped at a maximum value of one month's salary.

An employee loan agreement comes into effect when the employee has signed and dated it. 

We have included a free employee loan agreement template (UK) with this guide (below). 

Employee loan agreement template

Use this template to create an employee loan agreement for a member of your team. 

Once the template has been personalised as an individual employee loan agreement, it must be signed and dated before being sent out. The agreement then becomes binding once it’s countersigned by the employee.

Employee loan agreement template

[Today's date]

Dear [name of Employee],

I confirm that the details of your loan application have been checked and approved.

The agreement below will come into effect when it is signed and dated by both parties, and is for a loan amount of £[INSERT AMOUNT] to be paid back over [INSERT NUMBER] months. 

Yours sincerely,

[name of Employer/Employer representative]

EMPLOYEE LOAN AGREEMENT

PARTIES

(1) [INSERT NAME] of [INSERT ADDRESS] (Employee)

(2) [INSERT NAME] of [INSERT ADDRESS] (Employer)

1. AGREED TERMS

The following definition applies in this agreement.

Loan: the sum of £[INSERT AMOUNT] lent or to be lent by the Employer to the Employee or the total amount of that sum outstanding.

2. TERM

2.1. This agreement commences on the date the Employee signs this agreement and ends on the date that the Loan is fully repaid (unless terminated earlier in accordance with this agreement).

3. LOAN

3.1. The Employer will provide the Loan to the Employee by BACS transfer to the Employee’s bank account, subject to the terms of this agreement. The Employer will only pay the Loan to the account in which the Employee usually receives their salary.

3.2. The Employer will use reasonable endeavours to pay the Loan within 5 working days of receiving a signed copy of this agreement. Where payment falls on a bank holiday, payment shall be the next working day.

4. INTEREST

No interest is applied to the Loan and no fees or charges are levied on the Loan. Interest may be applied however if the employee doesn’t meet the terms of repayment as per this agreement.

5. REPAYMENT

5.1. Subject to the provisions of this agreement requiring earlier repayment, the Employee will repay to the Employer the Loan in full through [INSERT NUMBER OF MONTHS] consecutive monthly instalments of £[INSERT AMOUNT]. The first instalment will be taken from the Employee’s salary on the first month’s pay day (following the payment of the Loan), and the [INSERT REMAINING NUMBER OF MONTHS] subsequent instalments will be taken from the Employee’s salary every month on subsequent pay days.

5.2. If the Employee takes unpaid leave during the term of the Loan they

agree to inform the [INSERT PERSON OR DEPARTMENT NAME] before the period of unpaid leave starts, or as soon as reasonably possible, to discuss changes to the repayment schedule.

5.3. If the Employee hands in their notice to stop working or otherwise is no longer employed by [INSERT BUSINESS NAME] before the Loan has been repaid in full, the Loan will immediately be due in full and repayable on demand. The Employee agrees that [INSERT BUSINESS NAME] may deduct the outstanding balance of the Loan from any remaining salary payments due to them. If the remaining salary payment(s) is insufficient to cover the outstanding balance of the Loan, the Employee agrees to make arrangements to repay any shortfall before their last day of employment at [INSERT BUSINESS NAME]. For the avoidance of doubt, any sums the Employee fails to pay before the last day of their employment will remain due, and the Employer may take steps to recover the same by way of civil debt recovery and interest may be applied.

5.4. The Employee can repay to the Employer the Loan early in full or in part at any time and without penalty, but must first inform [INSERT PERSON OR DEPARTMENT NAME] in writing to specify the amount of the repayment. If the Loan is repaid early in part, any subsequent instalments of the Loan will be reduced pro rata.

5.5. If any repayment is not made in full and on time the Employer shall be entitled to terminate this agreement and seek immediate repayment of all outstanding sums.

Signed by [INSERT NAME OF Employee]

____________________________________________ ________

Signature of Employee Date

Signed by [NAME of authorised signatory, on behalf of the Employer]

___________________________________________ _________

Signature on behalf of the Employer Date

Save this employee loan agreement template so it’s on hand when you need it. 

You might also want to consider using HR software like CharlieHR for secure storage and easy access to all your HR paperwork.

You can try Charlie for free! We’re the most popular HR software for small businesses and startups.