Why A Credit Card Cash Advance May Be Your Worst Nightmare

If your business is strapped for cash and in a financial emergency, taking out a cash advance with your credit card may seem like an appealing option. Cash advances are quick and easy: they let you withdraw money using your credit card while only requiring a trip to the nearest ATM or bank. This makes them seem like an obvious choice.

However, cash advances are rarely your friend. In fact, they’re often wolves in lambs’ clothing, imposing costly fees and high interest rates while also limiting the amount you can request. In most scenarios, passing up a cash advance in favor of alternative measures may ultimately make more sense to help your business through a rough financial patch.

Unsure if a cash advance is right for your situation? Keep reading to find out!

How Credit Card Cash Advances Work

If your credit card has a pin number, a cash advance allows you to use your card at an ATM to withdraw money. If you don’t have a pin, you can take your card to a bank that provides advances inside your card’s payment network. Note that you may have to pay an ATM or bank fee.

With cash advances, you won’t usually be able to access your entire credit line. Instead, the available amount for a cash advance will likely cap out at several hundred dollars.

Frequently, this withdrawal will come with its own initial fee. This fee is commonly either a percentage (such as 3%) or a dollar amount (such as $10). You’ll almost always have to pay whichever amount is greater.

On top of this fee, your cash advance accumulates interest. In many cases, this rate is much higher than the card’s rate for purchases. Additionally, cash advances don’t offer grace periods—that means the interest will start accruing from the day you receive the cash advance.

Why You Shouldn’t Get A Cash Advance

Put simply: cash advances will lose you a lot of money, quickly. In almost all situations, using your credit card to charge purchases as normal will be much cheaper.

For starters, taking out a cash advance will subject you to upfront fees that aren’t present when buying directly with a card. Between ATM, bank, and issuer fees, you could be paying $10 or more on fees alone.

Besides this, interest rates for cash advances are usually higher than the credit card’s interest rate for purchases. Most credit cards offer purchase APRs between 10% and 25%. Cash advances, meanwhile, often have APRs above 25%.

Finally, normal credit card purchases offer grace periods. This allows you several weeks to repay without accruing interest. Coupled with high interest rates and no grace periods, a cash advance will likely cost you more, even if you repay a credit card purchase after its grace period is over.

Here’s an example:

Say you want to make a purchase for $300 and you have a Chase Ink Business Preferred card. If you take out a cash advance, this is what you’ll wind up paying:

  • $300 for the purchase.
  • $2.50 for the ATM fee (assuming you use an out-of-network ATM).
  • $15 for the minimum cash advance fee.
  • $4.68 for interest at 26.99% APR, assuming you repay 21 days later.
  • $322.38 total.

If you make the same purchase directly on the card, here’s the cost:

  • $300 for the purchase.
  • $0 for additional fees.
  • $0 for interest, assuming you repay by the end of the card’s 21-day grace period.
  • $300 total.

As basic math tells us, the cash advance is automatically more expensive than just putting the purchase on the card. In the above example, a $300 purchase will cost over $20 more via a cash advance when compared to just buying on the card.

Thankfully, most purchases these days can be made directly on a credit card, so it’s unlikely you’ll ever actually need to do a cash advance.

Is It Ever A Good Idea To Get A Cash Advance?

It is very rarely a good idea to request a cash advance. And because simply paying with a credit card is cheaper and more efficient, you should almost never need a cash advance.

However, if you have an emergency and are unable to pay with a credit card, can’t access your bank account, or don’t have enough money in your checking account, a cash advance could make sense. Potential scenarios might include your bank perceiving a trip abroad as fraudulent activity and locking your account or your office facing a serious plumbing issue with a plumber that only accepts cash.

In those situations, when time is short and a lot is on the line, a cash advance might make sense. But you should only use a cash advance if you know you will be able to repay it within a short time frame.

Credit Card Cash Advance Best Practices

Should you decide to get a cash advance, there are a couple of rules of thumb to follow.

To start, only take out an amount you know you can pay off. If you withdraw too much money and can’t afford to pay it off in a timely manner, the amount you owe after interest could become expensive.

In a similar vein, pay off the balance as fast as possible. Because cash advances carry high interest rates, you’ll want to be quick when it comes to paying off your balance. If you put a cash advance’s balance on the back burner, your repayment amount can pile up fast.

The Best Alternatives To Credit Card Cash Advances For Businesses

Short-Term Business Loans

If you are looking for emergency funds, but don’t need cash on hand immediately, a short-term loan may work for your business. These usually take the form of single, lump sum loans, intended to be repaid within a relatively short period of time.

You may also find success with these short-term loans if you struggle with bad credit. Besides being more friendly towards weak-credit businesses, short-term loans can help boost that ever-important credit score.

Want the full breakdown? Read up on the Merchant Maverick guide to short-term business loans. Here are a couple of our favorite options to get you started:

OnDeck

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LoanBuilder

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Business Lines Of Credit

If your business struggles with consistent emergency fund problems, you may want to look at getting a business line of credit. This option lets you access to a certain sum from which can withdraw money at any time.

With a revolving line of credit, the available amount of money replenishes every time you repay. Note that each withdrawal acts like a small loan—that means you’ll owe interest and will likely repay on fixed time intervals.

To learn more, check out our full guide to getting a business line of credit. We’ve included a couple of the best options below:

BlueVine

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Fundbox

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Personal Loans

You also have the option to take out a personal loan. This might work well for new businesses that lack credit history and struggle to qualify for more traditional methods.

Of course, you’ll be relying on your own, personal credit history. That means to get the best rates and loans, you’ll want to maintain a solid credit score. If you don’t know your credit score, check out one of our favorite (and free!) credit-checking websites.

Ready to get a personal loan for business? Here are some of the better options to get started:

Lending Club

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Prosper

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Final Thoughts

Requesting a cash advance via your credit card is rarely ever a good idea. With numerous extraneous fees and high interest rates, cash advances can be quite costly. Unless you are in need of cash for a true emergency, there are many better avenues when it comes to getting a loan for your business.

If you want to delve further into loan alternatives, Merchant Maverick has you covered. Check out our guide to different types of business loans. We’ve also broken down how to know if you can afford a small business loan.

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