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.

 

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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.

Credit card vs. merchant cash advances

The above cash advance definition concerns credit card cash advances. Another type of cash advance called a merchant cash advance also exists, but these loans work differently.

To obtain a merchant cash advance, you’ll set up a direct arrangement with your credit card provider. On the other hand, you’ll obtain a credit card cash advance by just walking up to an ATM and using your credit card as a debit card. Each loan’s repayment process is also quite different.

The remainder of this article pertains solely to credit card cash advances, though the SmartBiz Loans blog has plenty of additional resources about merchant cash advances:

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

A credit card cash advance can be great for your business if you need a short-term loan in a pinch, but it can also come with conditions that may prove burdensome for your business. Below, find the pros and cons of cash advances so you can determine whether they suit your needs:

Pros of cash advances

Among the reasons you may prefer cash advances to other loans are:

  • No application . Most loans require applications that include extensive paperwork, but cash advances are an exception. Since they come from credit cards for which you’re already approved, credit card issuers don’t implement additional application requirements for cash advances. Instead, getting your cash advance approved just requires going to an ATM and making a withdrawal.
  • Easier lending if your credit score is low . Given the lack of applications and other barriers involved with obtaining cash advances, you can still obtain cash advances even if your credit score is low. This feature is especially important if you’re still working to rebuild your business credit and don’t yet have a high enough credit score for other loans.
  • No need to maintain checking or savings account balances . Even if you have absolutely no cash in your business checking or savings account balances, you can still use a cash advance to cover your business expenses. That’s because your business credit card is entirely independent of your assets. That said, you should be careful not to use cash advances for purchases you aren’t fully certain you can soon afford.

Cons of cash advances

Among the cons of cash advances are the following:

  • High interest rates . Credit card cash advance interest rates can be prohibitively high for some business owners. This is especially true if you’re taking out a cash advance because you simply don’t have cash right now. If you’re not expecting an increase in your cash flow in the near future, then in the long run, you could wind up owing enough money to your card provider to make your cash advance financially infeasible.
  • Additional fees . For business owners lacking cash, the additional fees that come with credit card cash advances can feel like adding insult to injury. Between interest rates and additional cash advance fees, you could be looking at costs several times higher than with a Small Business Administration (SBA) loan.
  • Credit score impacts . Using a cash advance can lower your credit score. And if you’re using your cash advance because you’re already facing credit struggles, additional dents in your credit might be exactly the opposite of what you need.
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Why Cash Advances are Expensive

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.

High Interest

Cash advances come with very high interest rates, often significantly higher than you’ll pay on balance transfers or everyday purchases . 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.

High APRs

Cash advance APRs are often so high that they’re worth mentioning again in a guide like this one. A credit card cash advance can result in APRs of 20% to 30%, which is far more than with most SBA loans. These high fees come from the individual components of your APR – interest rates, cash advance fees, and ATM or bank fees – adding up to a large number. Learn more via the SmartBiz Loans guide to APRs.

ATM or bank fees

When you withdraw cash from your credit card account at an ATM, you’ll likely face yet another fee. Just as you pay ATM fees to withdraw cash from your personal bank accounts if the ATM you’re using doesn’t belong to your bank, so too do these fees apply for cash advances. This fee is also known as a bank fee, and the only way to avoid it is to use a debit card belonging to the bank. In other words, credit card cash advances make bank fees inevitable.

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.

Alternatives

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.

Carry a balance on your card

If you don’t need actual paper money for your current business needs, you can often save money by simply carrying a balance on your credit card. That’s because the APR your credit card issuer will charge on balances carried beyond your due date is often much smaller than cash advance APRs.

Additionally, you can think of your card’s credit limit as theoretical money that you can access at any time. For example, if your credit limit is $10,000 and you need funds for a $500 purchase, you can just use your standard line of credit. If you absolutely need cash for the transaction in question, see if you can negotiate a credit card payment directly with your seller or vendor. You could even offer to cover the vendor’s credit card processing fees to make this shift easier.

Reallocate funds

When done cautiously, reallocating funds from other parts of your budget can be a reasonable way to obtain cash when you’re in need. For example, let’s say you need $1,000 in cash for an equipment purchase but you’ve already exhausted your quarterly equipment budget. If you’ve barely touched your marketing budget this quarter, you can dip into that for cash instead.

That said, you should only reallocate funds from other budget buckets if you’re absolutely certain those buckets can go without the extra cash. If you drain your marketing budget right before a time of year when you traditionally embark on large marketing campaigns, then draining that bucket could cause you more financial challenges in the long run.

Consider a personal loan

Perhaps you’re considering cash advances because your company’s financial standing is too poor to obtain other loans. However, your personal credit report might still be good. If that’s the case, you can apply for a personal loan instead of a cash advance. Personal loans, though often smaller than business loans, make great substitutes for small cash advances. Just be sure to repay your personal accounts using your company’s income in this one instance.

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.

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