What Are Cash Advances? Types and How They Work

What Are Cash Advances?

How Do Cash Advances Work?

Common Cash Advance Fees

• Interest Cash advance interest rates are often higher than personal loans and interest rates for other business loans, even if you're getting a cash advance through a pre-existing credit card. 
• 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 APR for a credit card cash advance can run over 24%. 
• Cash advance fee Your lender may charge a fee for taking out a cash advance, even if cash advances were an advertised feature.
• 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.
• Expedite growth Small businesses might use a cash advance to purchase new equipment or materials and then repay that borrowed money with revenue generated by an increase in 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. Interest rates for advances may also be significantly higher than your card’s usual rate.
• 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 personal 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. Payday lenders can charge as much as 780% in annual percentage rate (APR), with an average loan running at nearly 400%.
• Rarely helps credit A payday loan cash advance usually won’t affect your credit because payday lenders typically don’t report to the credit bureaus. 
• Not available nationwide The District of Columbia, along with 16 states (Arizona, Arkansas, Colorado, Connecticut, Georgia, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, South Dakota, Vermont, and West Virginia) prohibit payday loans.

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, often 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 typically don’t amortize or take off interest as you pay back the balance.
• Doesn’t improve credit Merchant cash advance companies generally don’t have to report to credit agencies, so a merchant cash advance doesn’t help your business credit score.
• Contracts can be confusing The costs and repayment structure of MCAs can be complicated, and contracts often include unfamiliar terms that can make them difficult to understand. Also MCA providers typically do not provide APRs, which can make it difficult to compare the MCA to other financing products. 

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. Some lenders don’t allow you to use the proceeds of a personal loan for business, however, so you’ll want to check into any limitations.