Cash Advance: Definition, Types and How Does it Work?

A cash advance looks like an easy way to get cash fast, but it will eventually cost you a lot of money in interest and fees. Make yourself familiar with the terms of cash advance so it doesn’t hit like a big surprise to you. Better yet, opt for a cash advance when you’re in urgent need of cash.

What is Cash Advance?

A cash advance is basically a short-term loan, which is frequently borrowed from a credit card issuer. It is also defined as a process through which credit card holders withdraw an amount of cash against their available credit balance.

The fee and the interest that you pay for a cash advance are totally related to the size of the withdrawal and the length of your repayment, due to which cash advance is considered to be expensive, and when used, it should be considered as a short-term solution. A cash advance might not be useful to cover large expenses, as the issuer limits the maximum amount of cash you can access.

Types of Cash Advance?

Below mentioned are the three types of cash advances:

1. Credit Card Cash Advances

A credit card cash advance is considered a feature that is provided by many credit cards. It is basically a short-term loan through which the borrower will receive cash or cash equivalents up to 20% or 30% of the available credit limit on the card. Some cards will allow you to withdraw 50% or more of your available credit limit.

2. Merchant Cash Advances

Merchant cash advance (MCA) provides funds to small business owners according to their past sales and a projection of future sales. You will qualify and receive the funds in some days if your business brings in a good amount of daily credit card and debit card sales. While filling out a simple application, you can receive the funds in your hands within some days.

3. Payday Loans

Payday loans offer you access to future payments from your employer. In most cases, the payday lender asks for proof of income, such as a previous pay stub. Funds can be acquired through a physical location or online. However, payday loans are considered extremely predatory, and they should be avoided.

How Does the Cash Advance Work?

The process differs with the type of cash advance as well as with the lender:

1. Credit Card Cash Advances

You can acquire a cash advance at an ATM, which is the financial institution for your card, or you can write a convenience check, which is also known as an access check. It periodically gets mailed in your monthly credit card statement.

Merchants might use specific credit cards as a cash advance, as well.

Some of the transactions which might be processed as a cash advance include:

• Peer-to-peer money transfers through apps
• Beginning deposits when opening a bank account
• Overdraft protection when a credit card secures a checking or savings account
• Foreign currency, traveller’s checks or money orders
• Gold or virtual currencies
• Wire transfers
• Lottery tickets, casino chips, and gambling wagers
• Some gift cards and prepaid cards

You’re required to pay compounding interest earlier than the day when the cash is extended, plus an up-front service fee. Moreover, many credit card companies in the market make a portion of your revolving credit line accessible for use as a cash advance. This amount usually gets printed on your monthly statement or will be displayed when you log into your account online.

2. Merchant Cash Advance

A merchant cash advance is something other than what will get extended by your credit card provider, but these are provided in partnership with the payment processor for your debit and credit card sales. It does not charge an APR, unlike any typical loan. Instead, the repayment is based on the factor of your daily sales. This means that you’re supposed to make a daily repayment based on your sales at a factor of 1.1 to 1.5.

This factor signifies that your daily payment might increase if your sales are high and might reduce the cash flow of your business. Likewise, the payment will fall if the daily sales will drop.

3. Payday Loans

Payday loans are supposed to be short-term, small-amount loans that are secured by a deferred presentment transaction. The borrower offers a post-dated personal check or permission for a future electronic withdrawal. Although they’re defined as payday loans, the funds can also be secured by any other income, such as a pension. While these loans might look small, the fees can be huge. To get a payday loan, the borrower commits to finance charges. All these fees are added to the loan principal on the date of the transaction.

4. Cash Advance Credit Card Options

If you think of taking a cash advance from a credit card, then there are a few ways to reduce the cost. Many credit cards charge a fee or a percentage, whichever is greater. If you’re aware that a cash advance is in your future, then consider a credit card that offers 3% on cash advances as opposed to those charging 5% or more.

Credit sales also charge a separate APR for cash advances, which is generally higher than your purchase APR. Ensure that you shop for the lowest APR you can find on cash advances.

Cash Advance Pros and Cons

Pros of Cash Advance

• Immediate Access: Cash advances offer easy and fast access to funds, which can be important in emergencies.
• Convenience: If you have a credit card, getting a cash advance can be convenient as it often involves simple transactions at an ATM.
• No Collateral Required: In the case of cash advances, you usually aren’t required to offer collateral, unlike any other forms of loans.
• Highly Accessible: Some forms of cash advances might be available to businesses with poor credit or no credit history.

Cons of Cash Advance

• High Fees: Cash advances usually appear with high fees, including upfront transaction fees and additional finance charges. The fees can make the cost of borrowing more expensive than any other form of credit.
• High Interest Rates: Interest on cash advances tends to be higher than the interest rates on regular credit card purchases. The interest starts accruing immediately, with no grace period.
• Limited Amounts: The amount you can borrow through a cash advance is often limited, and it may not meet substantial financial needs.
• Not a Long-Term Solution: Cash advances are not something to rely on for long-term financial solutions. Depending on the means, you will need help managing your overall finances.

Some Other Considerations for Cash Advance

• Credit card cash advances do not earn any reward points.
• Convenience checks are less secure and offer fewer consumer protections than credit card purchases.
• Your credit card might need a PIN to access a cash advance from an ATM.
• As the merchant cash advances are unsecured, you should sign a personal guarantee that you’re responsible for repayment even if you leave your business.
• Repayment for merchant cash advances and payday loans often result in a payment that would be a triple-digit APR.

Cash Advance Terms and Fees

Cash advances are one of the brilliant ways through which one can access cash in the shortest time possible. However, it is accompanied by high charges relative to its benefits. Before going for a cash advance, read the terms so that you are informed about the steep penalties you will be charged.

• Cash Advance APR: Cash advances have a distinct interest rate, which is usually higher than the interest rates for purchases or balance transfers.
• Cash Advance Fee: Some of your card issuers might charge you a cash advance fee, which ranges from 3% to 5 % of each cash advance you request. For instance, a $250 cash advance with a fee of 5 % will translate to $12. 50.
• ATM or Bank Fee: If you go to one of these machines and try to get enough cash, or if you go to a bank and try to get some cash, then you’re required to pay a fee for a cash advance.
• No Grace Period: What a cash advance lacks is an interest grace period, to which most other types of credit are entitled. That is why you start incurring an interest on the date when you make a cash advance. That is quite different from when you use your card to buy goods and services, and the issuer of the card gives at least 21 days interest-free if the balance is paid before the stated date.
• Separate Credit Limit: They are normally a part of your account credit limit but usually have their credit limit. You may be able to borrow only a few hundred dollars.

Alternative to Cash Advance

1. Personal Loan

If you have good credit, then you can choose any of the personal loans, be it secured or unsecured, from your financial institution. Even with the potential origination fee and interest, the interest rates are typically lower than those for cash advances. This solution will take longer and require additional paperwork. However, if you require a large amount of money, then only the personal loan will meet all the requirements with a very low overall cost.

2. Negotiate a Payment Plan

Contact your creditors or service providers if you believe you cannot make your payment. If your credit account is in good standing, you can negotiate a lower interest rate. If creditors offer you an extension on payments, ensure you know what fees are associated with that service. For other bills like utilities, you can request a payment plan.

3. Pay Bills with Your Credit Card

If there are bills you usually pay with an ACH transfer or cash from your checking account, try to put them on your credit card. Because of this, you can easily pay for some purchases like car insurance, cell phone, and internet bills without any additional cost. This option will help you with freeing up your cash in your budget and will not take any additional cost or higher APR of cash advance.

Things to Keep in Mind While Using Cash Advance

With the increasing availability of cash advances through credit cards, merchant cash advances, or other forms, businesses must ensure that some factors are well understood so that they do not end up damaging their business.

Here are some important considerations for businesses using cash advances:

• Cost of Capital: Know the total cost of the cash advance, such as fees, interest rates, and all other costs that come with the cash advance. These costs should be compared to other financing sources in order to ensure that cost-efficiency is achieved.
• Terms and Conditions: Before signing the cash advance agreement, one should go through its terms and conditions and understand them. Be careful with the repayment terms, the fees, any obligations in the contract, and such.
• Impact on Cash Flow: In light of this, there is a need to look at the merchant’s cash flow patterns before taking the cash advance. Consider whether repayments are being made at the right time when you can afford them, especially if the repayments are affecting your business’s financial cycles.
• Purpose of the Cash Advance: To summarize, it will be useful to list the goals that should be met when describing the purpose of the cash advance. This requires well-defined purposes such as inventory, equipment, working capital, etc., and this acts as a measure to ensure that the funds are rightly utilized.
• Alternative Financing Options: Consider other sources of financing that can be used in the business, including trade credit, lines of credit, and invoice financing, among others. It will be relevant to compare the terms and costs and choose the option that will be best suited for your business.
• Repayment Plan: Make a realistic repayment plan. It is also important to make sure that they can comfortably repay the obligation without creating a strain on their operations.
• Credit Impact: Take time and consider the possibility of advantages and disadvantages of cash advances to your business credit. Unfortunately, not every type of cash advance is free from the influence of overshadowing credit score. Even if some types of such advances will not necessarily influence the credit score directly, it is still necessary to pay attention to possible consequences.
• Regulatory Compliance: It is also important to know any regulation requirements or limitations with regard to cash advances. Concerning this, some areas have regulations pertaining to lending services, and any form of violation attracts some legal ramifications.

How does Cash Advance Impact your Credit Score?

Getting a cash advance takes time to change a borrower’s credit or their credit score, although there are various roundabout ways of how it might happen.

• First, take the advance from a credit card. In that case, it increases the outstanding balance, which in turn increases the credit utilization rate, and that is a term used by credit scoring models when determining your score. Let’s say you have a $1,500 limit on one of your cards, and you presently have $500 in balance; your credit utilization ratio is 30%. Nevertheless, if you use a $300 cash advance on that card, the balance will be $ 800, which means credit utilization of 53.3% or more. This is an important factor indicating that high usage rates of credit risk are ordinarily signs of potential credit risk.

• For the record, a cash advance usually comes with a high rate of interest attached to it. This is usually the case with most cash advances. If this compromises the manner in which you make payments for the monthly charges, then that equally has an impact with regard to credit rating. If you exceed the credit card limit by using the cash advance, your credit score can be negatively affected. Once you are done paying off your balance, your credit report will reflect the highest amount that was reported, and other potential lenders will see that, at one point, you were beyond your line; this will disqualify you from getting credit.

Is Cash Advance Right for you?

There are always options to get money; in case of emergency, one can use a credit card and borrow cash; this is very convenient but very costly. Be certain that you have the preferable cash advance credit limit accessible on your credit card and intend to pay the cash advance balance in the shortest time possible. Note to yourself that your credit cash advance line is always a minimal percentage of your total credit line, whereas interest rates begin accruing immediately.

It is important that you know the fees, do more research, and weigh your options. There’s always an option that is cheaper than getting a cash advance. The important thing to note here is that if you are a merchant, read the terms preceding the Venom button very well. Most owners will prefer the other alternatives if they are compelled to sign as guarantors for the loan.

Cash advances offer short-term solutions for cash-flow emergencies. However, if you’re making this a habit, or if you require cash advances on a regular basis to make ends meet, then you need to make drastic budgeting and spending changes.