The holiday season is a paradoxical time for many businesses. On one hand, the shopping rush can translate to increased profits at the end of the year. However, the price of driving that rush can equate to extra expenses.
Holiday bonuses – a customary part of the owner-employee relationship for many companies – can be one of those extra expenses. Sometimes your team relies on receiving a holiday bonus to cover their own expenses.
What happens if you want to award bonuses but don’t have enough extra capital to cover the expense?
Related Article: Beware of Egg Nog: 15 Office Holiday Party Do’s and Don’ts
Often, borrowing money for an expenditure that is nonessential for your business can be a mistake. With the addition of interest and fees, taking on debt can make an optional investment more expensive, positioning you to need more capital later.
However, performance incentives that boost morale and fulfill promises to your staff can make the funding worth the extra expense. If you feel those “borrowed bonuses” can put you over the finish line – as opposed to just keeping you in the race – consider these questions to determine if it’s right for your business.
What Happens if I Don’t Give Bonuses?
This is the most important question to consider. If the answer is your staff will be disappointed and you might get some coal in your stocking, then typically you should not borrow to fund the bonuses. However, if your team’s performance or substantive morale depend on receiving a bonus, then borrowing could be what you need to keep happy, productive employees managing and running your business.
It’s not easy finding and keeping good employees, so giving your employees an incentive to stick around and thank you for their hard work could mean not spending time in your new year to hunt for new employees.
Will the Bonus Pay for Itself?
A loan should generate at least as much income as it costs; otherwise, it’s not a good business decision. Loans for holiday bonuses are no exception. It can be tricky to calculate the exact ROI for a holiday bonus, but evaluate the metrics you use for awarding bonuses plus “softer” considerations like employee retention savings and time spent finding or training new employees in the new year if they decide they’re not happy with an employer who doesn’t reward them.
How Long Will I Make Payments on the Loan?
Ideally, you would pay back your loan in fewer than two months by paying out holiday bonuses in December and recouping the loan amount by the end of the holiday rush. A longer period of time can make the loan less advantageous. If the answer is greater than six months, you probably should not borrow to pay bonuses.
Will This Happen Again Next Year?
Nearly every small business needs extra capital at some point to bridge a cash flow gap. Using a small business loan for funding holiday bonuses is an example of a stopgap loan. Having to take an “emergency” loan repeatedly for the same reason suggests there are other problems a loan is unable to solve.
If you think you’ll need to borrow again next year to cover holiday bonuses, seriously consider skipping this cost and focus on the larger financial challenges.
Related Article: 12 Client Holiday Gifts That Won't Break Your Budget
How Can I Minimize the Cost?
Even when borrowing money makes sense for your business, it’s best to borrow only the funds you need. To instill holiday cheer in the most cost-effective way, consider replacing cash with reward-based gifts or simply springing for a party for your entire staff.
Like almost every situation that impacts a small business, this decision won’t be one size fits all. Answering these questions can help you make a final decision based on the realities of your business.