What Are Cash Advances? Types and How They Work

What Are Cash Advances?

How Do Cash Advances Work?

Common Cash Advance Fees

• Interest: Cash advances often have higher interest rates than other loans, even if you're getting a cash advance through a pre-existing credit card. For instance, if your credit card has a 15% interest rate, a cash advance on that same card could have a 20% rate.
• • Annual Percentage Rate (APR): This is often used interchangeably with "interest rate," but APR means the total cost of your interest and fees over a year. The average APR for credit card cash advances is a staggering 25%.
• Cash advance fee: Your lender may charge a fee for taking out a cash advance, even if cash advances were an advertised feature. It is typically 3% to 5% of the advance amount.
• Withdrawal fee: If you're getting your cash advance via an app, bank, or ATM, you may be charged a fee related to taking out the advance. This could be in addition to other fees — so, a cash advance fee and a withdrawal fee may both be charged.

Common Uses of Cash Advances

• Unexpected costs: It can take a while to apply for certain loans and even longer to get approved. A cash advance could let a small business owner deal with emergencies immediately, like an unforeseen equipment repair, a fine, or flood damage.
• Catalog: Small businesses might use a cash advance to purchase new equipment or materials and then repay that borrowed money with revenue from their sales.
• Inconsistent revenue: When your business is experiencing a low-revenue period or lost work, cash advances can help cover ongoing costs.

Common Types of Cash Advances

Credit Card Cash Advances

Pros and Cons of Credit Card Cash Advances

• Convenience: Unlike other financing options, which often require applications and approval time, this is a speedy way to access cash. All you have to do is visit a local ATM.
• Available in emergencies: If you don’t have funds in your bank account and a needed service won't accept a credit card, this may be the only way to pay for a sudden expense.

• Cost: Credit card advances often require a fee and a higher interest rate. Fees generally range from 2% to 5% of the amount, though it may be a flat rate. There might also be a higher interest rate for advances than your card’s usual rate – sometimes as much as 10% more than what you normally pay.
• No grace period: You will likely be charged interest on your cash advances upon withdrawing the money.
• Credit score implications: Credit card cash advances can hurt your credit because high credit utilization can negatively impact your score.

Payday Loans

Pros and Cons of Payday Loans

• Convenience: The biggest draw for payday loans is their convenience. They offer money in hand, and you don’t have to fill out much paperwork or wait for long to get it. You may even be able to get one online if you live in the right area.

• Hefty costs: The costs for payday loans are very high. They require you to pay a significant amount of interest within a limited time, which could be anywhere from several days to a few months. States can set their own rules, to the point where some states have no interest rate caps. In California, the average APR for payday loans is 372%!
• Rarely helps credit: A payday loan cash advance usually won’t affect your credit because payday lenders typically don’t report to credit bureaus. 
• Not available nationwide: Washington D.C. and five states prohibit payday loans and many other states strictly regulate them.

Merchant or Business Cash Advances

Pros and Cons of Merchant Cash Advances

• Convenience: Compared to traditional loans, MCAs usually provide funds quickly. They also don’t require collateral, which may be a prerequisite for other financing options. Since most MCAs withdraw from your sales automatically, you also don't have to worry about paying each month.
• Accessible with low credit: Whether you still need to build your business credit or have a low credit score, you can still pursue an MCA, even with bad credit.
• Simple application process: MCA lenders tend to require minimal paperwork, even just the business’s basic financial information.
• Adjustable payments: Your payments are tied to how much your business is making.

• Cost: Factor rates and potential additional fees can make MCAs an expensive option. Relying on one too heavily can put your business in a debt cycle and restrict your cash flow.
• No prepayment advantage: There are no benefits to making MCA payments early. Unlike loans, MCAs don’t amortize or take off interest as you pay back the balance.
• Minimal government oversight: There’s no specific government oversight for MCAs, so merchant cash advance regulations are relatively lacking. This lack of regulation can mean risk for your business.
• Doesn’t improve credit: Merchant cash advance companies don’t have to report to credit agencies, so a merchant cash advance doesn’t help your business' credit score.

Is a Cash Advance Right for You?

Alternatives to Cash Advances

• Microloans: Small businesses in need of relatively small amounts of money may be able to apply for microloans from various sources. Turnaround is often speedy.
• Business line of credit: This is short-term business funding in which a lender makes a certain amount of money available for you to borrow from as needed. You pay interest only on the balance due.
• Business credit card: Like business lines of credit, you can also use these for an immediate expense. They often come with rewards that may appeal to small business owners.
• Personal loan for business: Especially if you have good personal credit, you might want to take out a personal loan to use for your business. Typically, there’s less paperwork and a faster approval time than there would be for a business loan.