Flexible Employee’s Salary Finance
Talib Kwatra discusses the case study of a financial organization that has adopted a disciplined approach in the use of finance loan funds and has thus managed to enjoy impressive returns on its invested capital. The main focus of this paper is on how such an approach can be extended to other areas of investment. This includes areas beyond finance, such as the real estate sector.
Finance loan is often used for salary finance. This form of financing enables the employer of the employee to manage the annual outflow of salary funds through a systematic repayment process. A review of the company’s financial wellness and expenditures in terms of both salary and job cost is carried out periodically. If the pre-tax income of the organization justifies the extra expenditure of lending money, then repayment is recommended to achieve a financial return. In addition to the salary, if there are provisions for additional payments to the employees in case of an emergency or loss of the business, then repayment of the loan is also recommended.
In this particular case, the salary finance loan plan was adopted as the main source of planned expenditures. The primary objective of applying for this finance loan plan was to support the salary costs of employees while maintaining financial wellness within the company. Assuming that the planned repayment pattern would be sustainable over the long term, the company would in effect be retaining some portion of its workforce on a year to year basis. For this reason, it was necessary to obtain pre-tax income support to provide a strong employment base and cushion for short term economic setbacks. Moreover, the company was not in a position to make any significant cuts in the workforce if it meant a drastic reduction of its overall wealth.
The second objective of applying for a salary finance loan was to support an expansion of business activity by providing a source of fixed interest income. While considering this option, the company would need to take into consideration the prevailing interest rates prevailing at that time, the duration of the loan repayment, and the repayment terms available as per the employment history of the employees. It was not possible to apply for this loan if the employees were holding remuneration based on a commission basis; since such a payment scheme did not allow for flexibility. It was necessary therefore to adopt a two-tier rate of interest. Since the loan amount needed to be large enough to finance large-scale projects, the interest rate should be high enough to secure both the short and long-term needs of the company.
While selecting the type of salary finance loan to be applied for, it was necessary to consider the existing trends in the interest rates and repayment terms prevailing in the market. Most of the companies provided a repayment schedule and an interest rate which varied according to the economic condition. It was better to opt for flexible plans which would help the employer to bear the fluctuating interest rate. Moreover, a fixed interest rate and a repayment period of more than one year were not a favorable option as it might leave the employee feeling undervalued.
Another important factor in deciding upon the salary finance loan was the availability of the collateral. If the interest rates were extremely high, the employer might not find it viable to offer any collateral. Thus the amount which could be offered should adequately cover for the interest amount and the repayment terms required by the employer.
The salary cuts often lead to a situation where there are a substantial number of salary payments outstanding. Under such a scenario, both the employer and the employee would face a financial crunch if interest rates were further reduced. At axis bank, it had been observed that most of the employers chose to take a fixed interest rate rather than opting for variable plans. Since the repayment tenure would be very long, it was possible to manage the payment and also improve the position of the pocket. However, if the employee did not repay the loan timely, it would affect his or her credit score.
When the economy was facing a recession, many people found it difficult to meet their needs even with the help of a loan. This was because the repayment terms were very long and it was almost impossible to pay back the loan amount on time. Many were forced to opt for loan repayments at very low-interest rates in order to avoid financial difficulties. The bank was well aware of this problem and hence decided to provide salary finance in the form of a line of credit. In case of any difficulty in repaying the loan amount, the borrower had the option of going for another loan that could be easily managed.