What Are Cash Advances? 3 Types of Cash Advances
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What Are Cash Advances?
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 quickly with emergencies, 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: A small business might not always have the same amount of income throughout the year. That doesn’t stop bills from coming in regularly. When your business is experiencing a low-revenue period or you’ve lost work, cash advances can help cover your ongoing costs.
Common Types of Cash Advances
Credit Card Cash Advance
Pros and Cons of Credit Card Cash Advances
Convenience. A credit card cash advance is a quick option for getting nearly immediate money. All you have to do is visit a local ATM. In contrast to other financing, which requires applications and approval time, this is a speedy way to access cash. Available in emergencies. If you don’t have funds in your bank account, this may be the only way you have to fix a sudden situation. Cost. The cost to withdraw money from your credit card can be very high since various fees may apply. A cash advance fee may range between 2% and 5% of the amount you’re withdrawing, or it may be a flat rate of, say, $10. 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 starting as soon as you withdraw the money from the ATM. Credit score implications. Potentially, cash advances can hurt your credit because high credit utilization can negatively impact your score.
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. According to the Consumer Financial Protection Bureau’s website, “Many state laws set a maximum amount for payday loan fees ranging from $10 to $30 for every $100 borrowed. A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400 percent.” It’s also possible that your interest will compound at a daily, weekly, or monthly rate. And a payday loan won’t help build your credit either because payday lenders typically don’t report to credit bureaus.
Merchant/Business Cash Advance
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. Accessible with low credit. Whether you still need to build your business credit or have a low credit score, you can still pursue a merchant cash advance, even with bad credit. Simple application process. Generally, MCA lenders have an easy application process. They tend to require minimal paperwork, which may include proof of the business’s basic financial information. Adjustable payments. Your payments are tied to how much your business is making. Cost: Factor rates can add on a significant amount, and, combined with additional fees, they make MCAs an expensive option. Relying on one long-term 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 in place for MCAs, so merchant cash advance regulations are relatively lacking. This lack of regulation can mean risk for your business. Don’t improve credit. Merchant cash advance companies don’t have to report to credit agencies, so an MCA doesn’t help your business build credit.
Cash Advance Alternatives
Microloans: Small businesses in need of relatively small amounts of money may be able to apply for microloans from a variety of sources. They’re often available on a quick turnaround. 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.
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