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How a Cash Advance Works

Updated Nov 10, 2023

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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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What is a cash advance?

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.

FYIDid you know

A merchant cash advance differs from a standard credit card cash advance. It provides immediate cash in exchange for a business’s future credit card sales receipts.

How does a cash advance work?

Cash advances from your credit card can be obtained in several ways.

  • In person: You can bring your credit card to your bank and request a cash advance.
  • At an ATM: You can enter your PIN and withdraw the cash. Keep in mind that ATMs typically limit how much money you can withdraw. If you don’t have a credit card PIN, contact your credit card company to get one.
  • Convenience checks: Some credit cards come with checks you can write to yourself and cash or deposit in your bank account.
  • Online transfers: Many credit cards allow you to transfer funds online to your business checking account or another bank account.

Cash advance fees

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: 

  • Cash advance APR: This is the total amount your credit card company charges for the cash advance. The APR is usually higher than what you pay for regular purchases. 
  • Cash advance fee: The fee is charged for the privilege of getting a cash advance; it’s usually 5 percent of the amount with a minimum fee of $10.
  • ATM fees: If you take cash from a credit card using an ATM, you may be charged a fee separate from what the credit card issuer charges for the cash advance. 
  • Online transfer fees: Online transfer fees can vary by credit card issue and the transfer speed you choose.

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. 

Fee types

Cost

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

$80.22

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. 

What are the pros and cons of a cash advance?

Cash advances have upsides and downsides. 

Pros of cash advances 

  1. Cash advances are easy to access. A cash advance is one of the most accessible and flexible financing methods. The process is straightforward. “The only real requirement to receive a cash advance is that the credit card with which you are requesting one offers cash advances,” Schrage explained. “There’s typically no credit check required.”
  2. Cash advances provide fast funding. You won’t have to wait days to find out if you’re approved for a cash advance and see the money in your account. The funding time is fast, which is crucial if you need money immediately.
  3. Cash advances have no spending restrictions. Some business loan types have specific restrictions on how you can spend the money you receive. Cash advances have no such restrictions. You can use the money to run payroll, chase growth, or do whatever you need to do. 

Cons of cash advances 

  1. Cash advances have hefty fees. Fees for cash advances can be exorbitant. “Your issuer will charge a cash advance fee, which is typically 3 percent to 5 percent of the transaction, with a minimum of $10,” explained Kevin Chen, a credit card writer at Finder.com. “Even more dangerous, perhaps, is the steep interest rate you’ll pay on your cash advance. It’s very common for cash advance APRs to be above 25 percent.”
  2. Cash advances can accrue excessive interest. Cash advances typically don’t have grace periods and start accruing interest immediately. Additionally, a cash advance could accrue interest at an excessive rate even after you’ve made a significant credit card payment. For example, if you carried a balance of $500 on your credit card and took a cash advance of $100, you’d have to pay off the initial $500 before your payments are applied to the higher-interest cash advance of $100.
  3. There are better alternatives to obtain money. Experts resoundingly advise that cash advances should be avoided unless they’re your only option. “Your best bet is to avoid needing a cash advance at all costs,” Schrage advised. “Instead, you could borrow money from a family member or friend [or] take out a personal loan.” 
Did You Know?Did you know

A hard money loan is another fast cash option. This financing method provides funds based on the value of a borrower’s collateral, usually real estate.

Is a cash advance bad for your credit?

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.”

TipBottom line

If you have bad credit and want a business credit card, you may have to opt for a secured card. Secured cards require upfront deposits and have credit limits but offer an opportunity to build credit.

What are the alternatives to cash advances?

Cash advances carry significant risks, so exploring alternatives is a good idea. Consider the following: 

  • Take out personal loans. A personal loan can help you get cash quickly. If you have sufficient credit, consider exploring personal loans from banks and other financial institutions.
  • Dip into your emergency fund. If you have an emergency fund you’re saving for a rainy day, you may realize the rain has come. If you find yourself taking out cash advances, you’re much better off dipping into your savings than taking out a cash advance.
  • Sell assets. Consider selling valuable items to amass cash. For instance, you can sell jewelry or clothing online or sell your car or bike if you have alternative transportation.
  • Ask family or friends. No one likes to borrow money. However, if you’re taking cash advances, the situation may be dire enough to warrant seeking loans from family and friends.
  • Use your credit card. If you need the money for a particular item or service, you may be better off charging it to your credit card.
  • Try peer-to-peer lending. Peer-to-peer lending helps people borrow money directly from investors instead of going through a financial institution.

Small business loans

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. 

  • SBG Funding. SBG Funding is an alternative lender that provides various funding types, including equipment financing, term loans and lines of credit. Read our review of SBG Funding for an overview of its flexible terms, funding speed and competitive rates. 
  • Noble Funding. Noble Funding is an industry stalwart with an easy application process, quick responses, and various loan options with flexible terms. Read our review of Noble Funding to evaluate its short-term bridge loans, long-term loans and asset-based loans. 
  • Fora Financial. Fora Financial provides short-term loans of up to $500,000 for small businesses. This alternative lender is known for flexible payment terms, discounts for early payoff and not requiring collateral. Read our Fora Financial review to learn how the lender is willing to work with borrowers with less-than-stellar credit. 
  • Rapid Finance: Rapid Finance provides fast funding — money lands in your bank account upon approval. This lender is willing to look beyond your credit score and doesn’t overcharge interest. Read our Rapid Finance review to learn about options like short-term bridge loans, lines of credit and merchant cash advances. 
FYIDid you know

To choose the best business loan, understand your credit situation, be smart about comparing interest rates, and realistically evaluate payment terms.

Cash advances as a last resort

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.

Cash advance FAQs

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.

Donna Fuscaldo
Staff Writer
Donna Fuscaldo is a senior finance writer at business.com and has more than two decades of experience writing about business borrowing, funding, and investing for publications including the Wall Street Journal, Dow Jones Newswires, Bankrate, Investopedia, Motley Fool, and Foxbusiness.com. Most recently she was a senior contributor at Forbes covering the intersection of money and technology before joining business.com. Donna has carved out a name for herself in the finance and small business markets, writing hundreds of business articles offering advice, insightful analysis, and groundbreaking coverage. Her areas of focus at business.com include business loans, accounting, and retirement benefits.
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