What Are Cash Advances? 3 Types of Cash Advances

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Ashley Kilroy

Updated May 11, 2021

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What are cash advances? In simple terms, a cash advance means that you’re being loaned cash upfront, based on an expectation that you’ll soon be getting money from another source so that you’ll be able to pay back the loan. Though they can take a number of different guises, cash advances are generally a risky form of funding, most commonly used by borrowers with poor credit. Whether you personally need fast cash or you’re the owner of a small business that could use some quick funding, cash advances can be tempting. You may feel sure that you have a paycheck coming or your business will be making sales and you’ll have the funds to pay back the money. And you may need quick cash in hand.However, before you run to the nearest ATM or lender, you should be sure you understand what you’re getting into. Read our breakdown of the most common types of cash advances and what you should know about them.

What Are Cash Advances?

Answering the question, “what are cash advances?” more specifically is tricky, since they can take different forms. For a credit card cash advance, it’s money you’ve withdrawn against your credit card limit. A payday loan gives you a short-term loan of upfront money against your coming paycheck. And, for small businesses, you may also see terms like business cash advance loans, merchant advance loans, or credit card processing loans, among others. In all of these, a lender loans your business a lump sum of money, based on your anticipated future sales. All of these loans involve getting upfront cash quickly, based on an expectation that you’ll be getting the means to pay back the loan. And all can be costly in terms of fees and rates.

Common Uses of Cash Advances

As an individual, you’ve likely found yourself short of cash from time to time. Taking out a credit card advance could be a solution if you know you’ll be able to repay the funds before too long. Or you might avail yourself of a two-week payday loan to get cash, planning to pay it back when you got your next paycheck. Those funds could be useful for anything from a car repair to an unexpected medical bill to buying books for school--any expense you hadn’t planned for. A small business owner may also use cash advances for unforeseen contingencies that require quick access to funds. That money can also cover short-term expenses and smooth out uneven cash flow. Some common uses might include:

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

Cash advances come in various formats. Here are three of the types you may be most likely to encounter.

Credit Card Cash Advance

A credit card cash advance is a cash loan typically issued to an individual through his or her credit card issuer. Credit card advances are designed to be useful when you have a cash expense you can't ignore, like an emergency bill. If you have a credit card that offers cash advances, you can visit an ATM, enter your PIN, and withdraw your selected amount, up to the limit your card allows for cash advances. Alternatively, you could request a cash advance check directly from your credit card company.

Pros and Cons of Credit Card Cash Advances

Credit card advances have some advantages but also significant drawbacks. Pros of credit card 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.

Cons of credit card advances:

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.

Payday Loans

Payday loans are similar to credit card cash advances in terms of what they promise. Essentially, payday loans are short-term loans that let you borrow against your future income. The lenders offer quick application processes and approval turnaround, and you can get fast cash to help you pay off things like sudden medical costs or home damage. Loan amounts usually range between $500 and $1,000, but the terms are generally very short and the costs associated with them are typically high.Depending on the state you live in, you may have different payday loan options and terms. For example, many states have a $500 limit in place while others, like Georgia, outlaw these loans outright. You may also have the option of online payday lenders, depending on where you live.

Pros and Cons of Payday Loans

Payday loans have one overriding benefit and likewise, one major drawback. Pro 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.

Con of payday loans:

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

As a small business owner, you may sometimes think about whether to get a merchant cash advance when your business needs money in a hurry. This is a cash advance that small businesses (merchants) may use to raise funds to cover immediate expenses. In return, the merchant cash advance (MCA) company typically receives a percentage of the small business’s sales until the debt is paid off.MCA funds may be available as soon as 24 hours after approval. Typically, the MCA company collects its payment either by withdrawing funds regularly from the merchant’s bank account or by taking a percentage of the business’s proceeds from debit or credit card deposits.Rather than an interest rate, MCA companies use a factor rate in their transactions. That’s a decimal figure, typically ranging from 1.1 to 1.5, calculated based on the risk the small business presents to the lender. That number is multiplied by the original amount borrowed to arrive at the total owed. For example, if you have a factor rate of 1.2 and you borrow $50,000, to find out how much you owe in total, you’d multiply the two numbers together to get $60,000, In other words, you would be paying $10,000 for a $50,000 loan. Additional fees may apply, as well.

Pros and Cons of Merchant Cash Advances

Typically, MCAs tend to be used as a last resort. However, they do have both pros and cons.Pros of a merchant cash advance:

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.

Cons of a merchant cash advance:

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

Just because cash advances provide quick access to cash doesn’t mean they’re the best option. From the absences of oversight to costly fees, cash advances come with considerable drawbacks. Individuals tempted by cash advances may be concerned about a poor credit history keeping them from loan approval. But these days, many lenders offer options to people with lower credit scores. Consider applying for a loan from a credit union, which may have more flexible conditions. You can also consider turning to your employer to ask for an advance on your next paycheck or speaking to family members about loans. If you’re looking for money for your small business, there are also other business financing options worth considering, including:

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.

Bear in mind, too, that online lenders may have less rigorous requirements and offer faster approvals than more traditional lending institutions. If you want to learn more about financing opportunities that may be open to your small business, Lantern Credit lets you compare lenders with just one application. That way, you can put your energy toward making your business a success.

The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)SOLC21029

About the Author

Ashley Kilroy

Ashley Kilroy is a personal finance expert with years of experience in radio, newspapers, magazines, and online content. Her work has appeared on websites including Forbes and Yahoo Finance. Ashley writes on a variety of personal finance topics for SoFi, including student loans, taxes, and insurance.

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