Cash Advance: Definition & Implications For Your Business

In a pinch for cash? A cash advance for your small business might be a good option to explore. This source of funds can be convenient. But just like any short-term loan, it can also be very costly. Learn more about the risks you should weigh against the benefits.



What is a Cash Advance?

A cash advance is a type of short-term loan that you can take out through a bank. You use your credit card to withdraw cash, but not directly from your bank account. Instead, the sum has to be repaid with interest, and includes considerable fees too.

How They Work

Cash advances are offered through your credit card provider. They usually come with a maximum that’s much lower than your card’s credit limit. You can receive the funds at the bank, by filling out a convenience check that the card issuer mails out, or even at an ATM.

Pros and Cons

The process for obtaining a cash advance is easy and convenient, but the price you’ll have to pay is steep. Here are some of the main reasons why cash advances can seem more enticing than they really are.

Cash Advance and Transaction Fees

Cash advance fees come from the credit card issuer. They can either be flat, meaning that they don’t change with the amount borrowed, while others can charge a percentage of the total. Sometimes, you’ll see a combination of the two: either a dollar amount or a percentage, whichever’s greater.

Another type of fee you might be charged is by the bank that processes the transaction. These vary depending on the specific financial institution and the amount advanced.


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High Interest

Cash advances come with very high interest rates. They can reach double your credit card’s APR for purchases. And the longer it takes for you to repay your outstanding debt, the more interest you’ll incur.

No Grace Period

On top of the steep interest for the cash you’ll be using, there is also no grace period when it comes to cash advances. Interest starts accruing as soon as the charge appears on your credit card account. Because of this, the best strategy is to make your payments as soon as possible, even before you get your bill. Interest continues building up independent of your billing cycle.


Borrow from Friends and Family

Getting a personal loan from the people who are closest to you can be a safe, easy option if treated professionally. Lay out a business plan and draft an official agreement so you can maintain strong relationships even when borrowing funds.

Make sure to follow through with documentation rather than relying on informal agreements. Keep in mind that entering into this kind of financial partnership can put personal relationships at risk and may also adversely affect your ability to access other kinds of loans.

Apply for an SBA Loan

If you find yourself in need of a cash advance, this might be a warning sign that you need to boost your business’s cash flow. If you think that’s the case, consider signing up for SmartBiz Advisor™. This free, AI-based, educational online tool will help you learn more about where your business stands in terms of being SBA loan ready. Like a CFO, it provides personalized recommendations to help you strengthen your lending profile so you can increase your chances of approval when you apply for a low-cost SBA loan with SmartBiz.


* The information provided through SmartBiz Advisor, including the Loan Ready Score, is for educational purposes and is not the same as scores used by lenders for credit decisions. SmartBiz Advisor is not a financial or legal advisor as defined under federal or state law. Use of this information is not a replacement for personal, professional advice or assistance regarding your finances or credit history.