What is a Cash Advance Loan? The Inside Scoop on Out-of-the-Box Financing Options

Whether you’re an individual or a small business owner, a cash advance loan can get you out of a critical situation where you need money quickly. However, before taking out any personal or business cash advance loans, it’s essential to know what these loans are and the different types available, so you can be sure you’re taking advantage of the best option.

What is a cash advance loan?

A cash advance is designed to be short-term and is based on the expectation that you’ll soon have the money to repay the loan. Cash advance lenders don’t look at your credit history but instead look at creditworthiness, which takes your income and potential to repay a loan into account.

Cash advance loans can be helpful when you or your business are in a bind and need cash fast, but you should always carefully consider your options before taking out any type of loan. Interest rates and fees can be much higher, so you’ll need to make sure you have a plan in place to pay it back to avoid paying more than your means. 

Credit card cash advances

Many personal and business credit cards offer cash advances. You usually make purchases with your credit card, but you can also take out a certain amount of cash based on your line of credit.

You can withdraw the money at an ATM or with checks that come with your card. Unlike regular purchases, a cash advance will have a higher APR. You’ll also pay an advance fee and sometimes withdrawal fees.

While credit cards have a grace period in which you don’t pay interest if you repay charges within a few weeks, interest starts immediately on a cash advance.

Small business cash advances

A business cash advance, also called a Purchase of Future Sales Agreement, is a cash advance based on a business’s future sales. The lender will look at your potential earnings and calculate their risk. Lenders then use this rate to determine how much you will own in interest.

You’ll receive the money almost immediately, but you’ll have to give the lender a percentage of your profits. You’ll continue to provide the lender a percent until all of the debt and fees are repaid.

Payday loans

Payday loans are sometimes considered a cash advance. With a payday loan, you get cash immediately with the promise that you’ll repay it when you receive your next paycheck. Payday lenders charge exorbitant interest amounts, and it’s estimated that only 15% of people can repay their loan within fourteen days. Instead, borrowers have to re-borrow and accrue more interest.

Parting shot

While you will pay more in interest and fees than with regular credit card spending or a traditional loan, cash advance loans are quick and convenient when you need money fast. As long as you have a disciplined plan for prompt repayment, plenty of financing options are available to you. Research your options carefully and consult with a financial advisor to make the best decision for your company.