Do you need cash today? How cash advances work (2023)

When a business needs cash, it can be tempting to turn to a quick fix rather than spending the time and effort to apply for a loan from a reputable bank or microlender. While a cash advance is usually quite easy to obtain and you can have the cash almost instantly, you might be surprised at how much this convenience can cost.

There are different types of cash advances, so let's dive in and see how they work.

Credit card cash advances

This is exactly what the name suggests: taking money from a fee or your credit card issuer. Just pop your card into an ATM or present it at a bank and you'll get cash. Instead of buying an item or service, you are essentially buying money. Usually you receive an amount equal to the credit limit you have on the card, or a very high percentage.

Unlike buying an item with your card, however, you will be charged an additional fee for borrowing money, usually three to five percent of its value, with a minimum fee of $10.

Also, you pay a higher interest rate for a cash advance than you would for an actual purchase. The average APR on a credit card cash advance is 24%, which is 6% higher than the average interest rate for purchases.

In a recent polltarjetasdecredito.comI found a company that charges 36% interest on cash advances! Also, interest begins (and accrues on its own) the day the money is borrowed; There is no grace period before interest begins to be charged.

(Video) How a Credit Card Cash Advance Works (and why you shouldn't do one)

You know those checks you get in the mail from your credit card company? Be very careful with them because they are another way to get a cash advance. Using these checks is the same as withdrawing money from an ATM or bank using your card.

For the above reasons (fees, high interest rates and lack of grace period), many loan advisers recommend using cash loans only in emergencies or when lower cost options have proved impossible.

In general, most people seem to follow this advice. The government's Bureau of Consumer Financial Protection says that only 3% of active cardholders used their card for a cash advance in 2012. But to give you an idea of ​​how expensive it is to use cash, even with a fee of such low usage, upfront fees account for 20% of all fees charged by card issuers.

Cash advances for merchants

With merchant cash advances, you don't transfer the money to your credit card; Instead, a merchant cash advance company gives you cash in exchange for a percentage of the daily credit and debit card income you earn from your business transactions. Because many sales are made with credit cards, restaurants and small retailers tend to be the types of businesses that turn to cash advances for financing.

The merchant cash advance company keeps its share of the daily earnings until you pay it back, including the principal you borrowed and any fees charged for the privilege. You don't pay them yourself; They receive the money directly from the processor that processes card payments for their business.

Merchant cash advances are generally meant for short term loans. Depending on the terms, some will specify the period in which they must be paid, while others will simply collect your percentage until you pay them. Payments are normally deducted directly from the credit card income you generate each day, although a newer type of merchant cash advance allows the financial company to receive money from a bank account that you have linked to them for the sole purpose.

(Video) What is a Cash Advance? | Discover | Credit Resource Center

Technically, merchant cash advances are not loans, you are selling a portion of your future sales. This is important because companies making the advance may not be subject to all of the government's usury laws, which prevent lenders from charging much higher fees and interest rates than banks. Indeed, this also makes this area of ​​finance largely deregulated, which represents a "buyer wary" situation.

On the plus side, since payments to the cash advance company come directly from the company's daily sales, the cash flow can be a little easier to manage than a lump sum payment. Pay more for entry when sales are high and less when sales are low to minimize the impact of business fluctuations.

Cash advances are usually processed much faster than traditional loans, so the money is available more quickly, often within a few days. And they rely more on a company's historical performance than the owner's personal creditworthiness, so some companies may more easily qualify for them.

Cost of a dealer loan

Other than that, they are expensive. For example, you would sell about $25,000 of future credit card sales to receive an immediate payment of $20,000 from a finance company. The finance company would collect a portion of every credit or debit card sale you make (typically 5-15%) until the total $25,000 is collected. Essentially, that means you're paying $5,000 for the $20,000 you need, or a whopping 25%. Depending on how quickly you pay, the APR on a business cash advance can be anywhere from 60% to 200%, depending onLeonard Wright, colunista do "Money Doctor"para or American CPA Institute.

In addition to being expensive, the cash advance comes right after your sales, leaving you with a lot less to pay the rest of your bills. Depending on your profit margin, this means you have to weigh very carefully how much money to take and what percentage to give up. You need to make sure you make enough sales with a large enough profit margin to pay back the borrowed amount.

How does a cash advance for merchants work?

How do advancements work? While the requirements are less stringent than for bank loans, they do exist. While stringent credit checks may not be required, companies that offer merchant cash advances generally do not lend to companies that have been in business for less than a year or that have declared bankruptcy or tax liens.


The finance company is primarily interested in your credit and debit card transactions because that is how they are paid. Therefore, the amount you can borrow depends on how much volume you earn from the cards.

The newest category of cash advances, ACH (Automated Clearing House), also caters to customers who don't make much from credit card sales but still have a daily income. They are directly linked to your bank account and carry your refund every day, week or month. Each lending company has its own system for measuring your sales and deciding how much money to advance.

However, knowing how expensive this type of financing is, it is crucial not to bite off more than you can chew. A reputable cash advance company will take great care to understand their profit margins and work within them to ensure that the amount they earn from each sale does not affect their viability as a business. Of course, they want to get paid as quickly as possible, but they need to adjust their recovery rate so that it works for both of them.

As this business is not regulated like banks and other lenders, there are no clear guidelines for disclosing all the fees and costs involved. Find out about the conditions before signing the contract. All aspects of the transaction must be clear and transparent. Ask for (and double-check) the APR of the money you need to pay so you can compare the cost of that money to other available funds. While a business cash advance is your best option, look for the best terms among companies. The field is very competitive.

Also remember that raising funds through a cash advance will not help your business gain credit. Because they are not defined as credit, merchant cash advances are not reported to the credit bureaus.

There are a few reasons why a business might consider using a business cash advance. The industrial trade group, theNorth American Advanced Traders Association, says some of the most popular uses have been buying new equipment, stocking or seasonal goods, expanding or renovating, paying off debt or taxes, and emergency funding.

(Video) How Does A Credit Card Cash Advance Work | How To Profit With A Cash Advance | How To Pay No Fees

Another financing option: factoring

Long before there were cash advances against future credit card sales, they existed in another form through "factoring," the sale of bills or accounts receivable at a discount.

A factoring company basically buys your current invoices at a discount and gives you a cash advance on your debt minus a percentage fee. Companies charge different rates based on your industry, the amount of factoring, and the time it takes to collect. Fees are usually between 2% and 5% per month. Of course, even these relatively low interest rates increase every year. At 2% you pay an APR of 24%, while at 5% the amount increases to 60% APR.

A possible downside to factoring is that your customers will need to send their payments to a third party rather than directly to you, which could be a sign to them that you are raising finance this way. Still, some business owners prefer the security of working with actual invoices rather than estimates or forecasts like merchant cash advances.

As with merchant cash advances, you can usually get cash from a factoring service within 24 to 48 hours of completing the application process. It's a little more complicated and time-consuming than merchant cash advances, as a factoring company needs to carefully check your invoices to ensure there's a high probability that you'll get paid. Also, many factoring companies don't want to deal with invoices that don't have a monetary value worth mentioning. In general, this is not a good option for restaurants, small retailers or service providers, as they would not generate bills large enough to take out loans.

Cash advance overview

In short, cash advances, whether from credit cards, business cash advance companies, or factoring companies, can be a relatively quick and easy way to finance businesses, but they are VERY expensive. If you choose to go this route, understand exactly what you are paying and consider doing so ONLY after you have exhausted other options from reputable lenders.


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