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PERSONAL FINANCE

This Startup Offers Cheap Loans for Relocating Employees

A San Francisco lender offers a much lower borrowing rate for new hires who need cash to relocate
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If your startup is trying to lure talent across the country, a sticky little problem is the cost of relocating.

After all, let's say you run a startup in San Francisco and you hire a newly-minted MIT graduate. Should you give an upfront bonus to cover the cost of relocating? If you do that, the new employee will only get the fraction of that check left over after paying taxes.

On the other hand, if you reimburse the new employee for the expenses incurred, the employee is either going to end up with a severely depleted bank account or have some huge credit card bills that need to be paid before the new employee gets on the payroll.

If the employee pays the entire bill within 30 days, there is no interest charge. But if not, the employee could end up borrowing money at a fairly steep annual interest rate of about 25%.

But now there is another way to go. New employees can take out a relocation loan from a San Francisco-based startup, Earnest, at a much lower interest rate.

In a July 16 interview with Louis Beryl, Founder/CEO of Earnest--that bills itself as "the world's first merit based loan program for financially responsible adults and college graduates"--I learned that the interest rate on that loan could be as low as 5.5%.

According to Beryl, "If an employee flies across the country for a job, he will have to buy an airplane ticket, move his clothing and other personal items, pay a security deposit for a place to live, and maybe buy new furniture."

"This could create a cash flow problem for the new employee. After all, if the employee moves in May but starts work in September, he will have to come up with the cash to make all those payments well before he starts collecting income," explained Beryl.

To help such individuals, Earnest offers loans of between $1,000 and $20,000 that must be repaid within 12 months (5.5% rate) or 24 months (6.5% rate). Borrowers pay in monthly installments.

Earnest does not face much competition because its rates are so much lower than the alternatives. Said Beryl, "If you take a $10,000 cash advance from your credit card, you will pay a 3% origination fee--$300--plus an interest rate between 19% and 25%."

Earnest does need to see the offer letter in order to offer the loan. And it partners with many startups--which makes it easier for their human resources departments to tell new employees that they can work with Earnest and they don't have to go through a lengthy approval process.

It sounds like Earnest is getting some well-known partners. Said Beryl, "We are working with Facebook and Google as well as smaller companies like TripAdvisor, Groupon, Pandora, and SpaceX."

Since most startups can't afford to give new employees the money they need to relocate, Earnest's offer sounds like a better solution than many of the alternatives.

Last updated: Jul 17, 2014

PETER COHAN

Strategy consultant, startup investor, teacher, corporate speaker, pundit, and author of 11 books, Peter Cohan has invested in six startups, three of which were sold for a total of $2 billion. Before founding Peter S. Cohan & Associates in 1994, he worked with HBS strategy guru Michael E. Porter.




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