Getting a cash advance may be quick and easy, but it’s expensive. Learn more about how they can help or hurt your business.
When a business needs money, it may be tempting to turn to a quick fix rather than taking the time and making the effort to apply for a loan from a bank or reputable microlender. While a cash advance is usually easy enough to get and you can have the funds almost immediately, you may be surprised just how much that convenience can cost you.
Credit Card Cash Advances
This is exactly what the name suggests: getting money from a credit or charge card issuer. Simply put your card into an ATM or present it at a bank, and get cash. Instead of buying an item or a service, you are essentially buying money. You’ll usually be able to get an amount equal to the credit limit you have on the card, or a fairly high percentage of it.
Unlike when you buy an item with your card, however, you’ll be charged an extra fee for borrowing money with it, usually from three to five percent of the amount, with a minimum fee of $10.
You’ll also pay a higher interest rate on a cash advance than you would when you make an actual purchase. The average annual percentage rate of interest on a credit card cash advance is 24%, which is 6% higher than the average rate on purchases.
In a recent survey, found one company charging 36% interest on cash advances! Not only that, but the interest will begin (and compound, building on itself) on the day the cash is borrowed; there is no grace period before interest charges start.
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 those checks is the same as taking money from a cash machine or bank with your card.
For the reasons stated above (fees, high interest, and lack of a grace period), many credit counselors recommend using credit card cash advances only in case of emergency, or when other less-expensive options have proven impossible.
In general, it seems most people follow this advice. The government’s Consumer Financial Protection Bureau says only 3% of active cardholders used their cards for cash advances in 2012. But to give you an idea of how costly it is to do so, even with such a low usage rate, the fees for cash advances made up 20% of all fees collected by card issuers.
Merchant Cash Advances
With merchant cash advances, you don’t charge the money on your credit card; instead, a merchant cash advance company will give you money in exchange for taking a percentage of the daily credit and debit card income you earn from your business transactions. Because so many sales are put payday loans in Iowa on credit cards, restaurants and small retailers tend to be the types of businesses that turn to merchant cash advances for funding.
The merchant cash advance company takes their cut from each day’s proceeds until you’ve paid them back, including the principal you borrowed and whatever fees they may have charged for the privilege. You don’t pay them yourself; they get the money directly from the processor that handles the card payments for your business.
Merchant cash advances are generally meant to be short-term loans. Depending on the terms, some will specify the time period in which they need to be paid back, while others will simply collect their percentage until you’re done paying them off. Usually, the payments will be taken right from the credit card revenue you bring in each day, although a new kind of merchant cash advance will allow the finance company to take money from a bank account you’ve linked to them for just that purpose.