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What Are Cash Advances? Types and How They Work

What Are Cash Advances? Types & How They Work; 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.
Ashley Kilroy
Ashley KilroyUpdated October 22, 2021
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Whether you personally need fast cash or you’re the owner of a small business that could use some quick funding, cash advances are often tempting. However, before you run to the nearest ATM or lender, you should be sure you understand what you’re getting into. Read on to learn more about what cash advances are, how they work, the most common types, and how to decide if a cash advance is right for you. We'll also discuss some alternative options if you decide against getting a cash advance. 

What Are Cash Advances?

A cash advance is a small, short-term loan that provides upfront cash based on an expectation that you’ll have the means to pay back the loan. They're often convenient in the short term, but all can be costly in fees and rates over time.Answering the question “what are cash advances?” more precisely is tricky since they can take different forms. A few common options are credit card cash advances, payday loans, and those for small businesses. All of these work in slightly different ways.

How Do Cash Advances Work?

In broad terms, any time you borrow against yourself (or your business) is considered a cash advance. A credit card cash advance is money withdrawn against your credit card limit. A payday loan gives you a short-term loan of upfront money against your coming paycheck. Small businesses may see terms like business cash advance loans, merchant cash advance loans, or credit card processing loans. In all of these, a lender loans your business a lump sum based on your anticipated future sales. Cash advances don't tend to involve collateral, cosigners, or anything else that would assure a lender that you'll be able to repay the money. Because of this, fees and interest can be very high to ensure the lender isn't taking too big of a risk.In addition to the higher fees and interest rates, cash advance lenders often don't allow grace periods (meaning you owe interest starting the day you make your withdrawal).Make sure you consider these factors when deciding whether to pursue a cash advance.

Common Cash Advance Fees

Cash advance interest rates and fees may be higher than those for typical loans such as personal loans or credit cards. A few cash advance costs and fees to be aware of are:
  • 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

Most people, including business owners, have found themselves short on cash from time to time. If you find yourself in this situation in your daily life, taking out a credit card advance could be a solution if you’ll be able to repay the funds quickly. You could also choose to take out a payday loan, planning to pay it back when you get your next paycheck. These funds could be useful for any expense you hadn’t planned for and can't afford without them.A small business owner may also use cash advances for situations requiring 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 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

Cash advances come in various formats. The three types you may encounter are credit card cash advances, payday loans, and merchant or business cash advances.

Credit Card Cash Advances

A credit card cash advance is a cash loan typically issued to an individual through their credit card issuer. Credit card advances are designed to be helpful when you have an expense you can't ignore but can't be paid by your credit card—for instance, some retailers don't accept credit cards, but you may still need their products.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.Bear in mind that your credit limit and cash advance limit may not be the same. For instance, if your overall credit limit is $10,000, you probably can't withdraw $10,000 as cash. In fact, your cash advance limit could only be a couple hundred dollars.

Pros and Cons of Credit Card Cash Advances

Credit card advances have some advantages but also significant drawbacks. Pros of Credit Card 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.
Cons of Credit Card Advances
  • 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

Essentially, payday loans are short-term loans that let you borrow against your future income. The lenders offer quick application processes and approval turnaround. Loan amounts usually range between $500 and $1,000, but the terms are generally very short and costly.Whether a payday loan is considered a cash advance depends on who you ask; the two are similar, but the interest and fees for payday loans are often much higher.

Pros and Cons of Payday Loans

Payday loan cash advances are sometimes useful in emergencies, but the cons may outweigh the pros.Pros 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.
Cons 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. 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

A merchant cash advance, sometimes called a business cash advance, allows small businesses (merchants) to cover immediate expenses. In return, the merchant cash advance (MCA) company typically receives a percentage of the 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 by withdrawing funds regularly from the merchant’s bank account or 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 borrow $50,000, multiply the two numbers together to get $60,000. You owe an extra $10,000 on your $50,000 loan, plus any additional fees.

Pros and Cons of Merchant Cash Advances

Typically, merchant cash advances are a last resort. However, they do have both pros and cons. Pros 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.
Cons of Merchant Cash Advances
  • 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?

Cash advances are usually a last resort. However, there are times you may need to use one. For example, a credit card cash advance may be your only option if you don't have enough money on hand for a necessary service that doesn't take credit cards. Maybe you’re driving cross-country and start to have engine troubles. The only car repair shop for miles does not accept credit cards and you don’t have enough cash to spare on the repairs. You head to an ATM and take out a credit card cash advance to cover the costs, hopefully with the knowledge that you will have enough money in the near future to pay back the advance. This is just a hypothetical example but speaks to the unique and dire circumstances that may warrant a cash advance. You may also need a cash advance if you're traveling abroad and need to pay cash for services, goods, or gratuities. Cash advances may be your only option if you travel abroad, where businesses may not accept American credit cards.

Alternatives to Cash Advances

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 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 businessEspecially 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. Some online lenders allow for prequalification, meaning you can find offers with specific rates and terms without affecting your credit score. 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.
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

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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