If you’ve ever needed cash quickly, you understand the desperation and pressure this situation causes. Nobody likes having financial obligations they can’t meet, so many turn to a type of financing known as a cash advance. Cash advances are short-term loans that don’t require an application or a credit check. They may seem like a great option in a pinch, but cash advances aren’t always a wise choice. In many cases, they can exacerbate an already challenging financial situation.
How do you know when to consider a cash advance and when to find another option? We’ll explain cash advances and their pros and cons to help you make an informed financing decision.
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A cash advance is a short-term loan you can access via a credit card. You can get the cash from an ATM or bank branch, or you can transfer the money online. Not all credit cards are eligible for cash advances. Small business owners may use a cash advance from their business credit card to meet payroll or address another financial emergency.
“A cash advance is basically where you borrow money from your credit card and pay a pretty exorbitant interest rate upon repayment,” explained Andrew Schrage, co-founder and CEO of Money Crashers.
Cash advances are an expensive way to borrow money quickly. They typically carry a higher interest rate than standard credit card purchases, often around 25 percent or higher.
Cash advances from your credit card can be obtained in several ways.
Cash advances are easy to obtain, but that convenience comes at a price. Cash advance fees depend on the particular credit card’s APR and how long you carry a balance. They can be charged as a flat fee per transaction or as a percentage of the total cash you receive. Some banks deduct the cash advance fee directly from the money advanced to you or bill you when you receive the advance.
The following fees may apply:
Here’s an example of the potential costs for a $300 cash advance, assuming you pay it off the following month. Remember that the longer you carry a balance, the larger the fee will be.
Cash advance fee
5 percent of the amount withdrawn, or $10, whichever is higher
$300 cash advance = $15 fee
Cash advance APR
16.99 to 28.99 percent
Cash advance ATM fee
$1.50 to $3.50 per transaction
Interest (26.74 percent) on cash advance
Convenience check cash advance
5 percent of the amount of each advance, or $10, whichever is higher
Cash advance at a bank
5 percent of the amount of each advance, or $10, whichever is higher
The total cost for your $300 cash advance would be $98.72, assuming you withdraw the money at an ATM with a $3.50 fee and pay off the cash advance in one month. Those fees compound every month you carry a balance.
Cash advances have upsides and downsides.
Cash advances don’t require a credit check, so they don’t necessarily impact your credit score immediately. However, your credit utilization rate is a significant credit score factor. Experts recommend maintaining a credit utilization of no more than 30 percent. This means that 70 percent of your total credit limit should be available at any given time. Because cash advances use a portion of your credit limit, excessive withdrawals can ultimately drag down your credit score.
“The dangers of a cash advance usually involve revolving utilization debt,” explained Chane Steiner, CEO of Crediful. “You borrow against your check or your credit card, and because of the high interest rates, it takes a significant amount to pay this back, which often requires you to take out another advance. This is a slippery slope in terms of debt.”
Cash advances carry significant risks, so exploring alternatives is a good idea. Consider the following:
Small business loans may be a much better funding option for business owners. The best small business loans vary widely depending on your situation and include options like fintechs, alternative lenders and funding marketplaces.
The following lenders provide fast business loans that may be excellent alternatives to cash advances.
Cash advances are expensive and potentially dangerous entryways into a vicious cycle of high-interest debt. Avoiding a cash advance is your best option. However, if you find yourself in an emergency with no other fast financing available, a cash advance could help you out of a jam. Still, only accept a cash advance if you know you can pay it off quickly.
Ultimately, debt should be a tool, not a necessity. If you can’t survive without high-interest financing like a cash advance, it might be time to question the viability of your business model. Consider reassessing and relaunching your business instead of taking on a heavy debt burden.
Let’s say you visit an ATM and withdraw $1,000 cash from your business credit card using a PIN. If you use an ATM unaffiliated with your credit card issuer, you’ll typically pay an ATM fee of about $3. In addition, you will be charged a credit card advance fee that may be as high as $50.
If your cash advance APR is 28 percent and you repay your cash advance over six months, your total cost for the $1,000 cash advance would be $136.24. This includes a $50 cash advance fee, a $3 ATM fee and $83.24 in interest.
Cash advances are billed monthly on your credit card statement. The quicker you pay it off, the less interest you’ll accrue.
While cash advances are based on your credit limit, payday loans are based on your future expected income. They’re the personal equivalent of a merchant cash advance.
“[A payday loan] is a type of cash advance that borrows against your income and expected check,” Steiner explained. “Again, these have high interest rates and unfavorable terms, but they are approved quickly without considering your credit score.”
Merchant cash advances are based on a business’s future revenue. If a lender provides a merchant cash advance of $20,000 for your business, you would repay the advance with a percentage of its monthly revenue until it is repaid in full — plus fees.
Merchant cash advances require significant evidence of your existing revenue; they’re among the most expensive types of business financing available. A cash advance is an easier solution if you’re willing to pay the price.
Yes. If you have a Cash App account, you may be able to borrow against it and get a cash advance. Open the app and go to the Banking header. Look for the word Borrow; if it’s there, you can get a cash advance. Tap Borrow > Unlock, and the app will tell you how much you can borrow. The cash advance fee will also be disclosed.
If you are in dire straits and need cash instantly, a cash advance is an option. However, it should be reserved for desperate situations because the fees and interest make it a costly solution. It’s better to plan for continuous cash flow or seek a fast business loan.
Jennifer Dublino contributed to this article. Source interviews were conducted for a previous version of this article.