When your business needs cash now, a business credit card cash advance can prove invaluable. A credit card cash advance gives you immediate access to financing without wondering about your approval odds for a loan, or how quickly you can get the money.
But this fast financing comes with a cost. So before you use your credit card to get cash, understand the pros and cons of a business cash advance.
What Is a Business Credit Card Cash Advance?
A cash advance from your business credit card allows you to immediately get cash by drawing from your credit card’s line of credit. To get a cash advance, you will need a credit card that has available credit. Some issuers may restrict the amount of your available credit that you can use for cash. You can check your available credit on your online account or by calling your issuer.
You can get a cash advance in one of two ways: from an ATM or by going to a local bank or credit union branch where you will present your card and an employee will process the advance. You can visit any ATM or financial institution that accepts the brand of card you carry, such as Mastercard or Visa; it does not have to be the financial institution where you have an account. If you want to deposit those funds into your business bank account, though, you may want to get the advance from your financial institution. You will have to provide satisfactory identification such as a driver’s license
In the case of a cash advance from an ATM, you’ll need a PIN. If you have not already been assigned one or lost yours, contact your card issuer or go into a financial institution instead.
How Much Does It Cost?
Most credit card issuers charge a different interest rate for cash advances than for purchases. The cash advance rate is often higher than the purchase rate; 23%-26% is typical. Also, many issuers charge a cash advance fee of 4%-5% of the advance, often with a minimum fee of $10. This fee is added to your balance as soon as the advance is processed. If you access a cash advance from an ATM, you may incur an additional ATM fee.
With a cash advance you lose the benefit of the grace period, and interest is charged immediately on the balance.
The combination of the higher interest rate and fee(s) can make this an expensive way to borrow for your business. At the same time, it may be cheaper than other types of fast financing which can charge interest rates of 30%-90% or even more.
In addition to the cost, one of the main drawbacks to a business credit card cash advance is that you may not be able to pay back the debt. If you default on a credit card, your personal and business credit reports and scores are likely to be negatively impacted. Small business credit cards from major credit card issuers require personal guarantees. That means if your business cannot pay back the debt, you will be personally responsible.
Remember, as your balance increases on your credit card, your monthly payment will rise. Carefully consider whether you can make the higher payment.
At the same time, minimum payments are often so small that if you only pay the minimum, your business will be in debt for years, or even decades. Calculate how long it will take you to pay off your debt; because of the cost, these cards are best if you use them for short-term financing.
Even if you pay on time, the balance may affect your credit. Some small business credit cards report activity to the owner’s personal credit reports. A high balance in comparison to the credit limit can lower your credit scores. Some business credit scores also evaluate debt usage, though it does not tend to have as significant impact as it does with personal credit scores.
Other options you may want to consider for fast access to funding may include:
- An overdraft line of credit on your business checking account
- An online small business loan or line of credit
Plus, there’s another way to access cash from your business credit card: a balance transfer. Many issuers will allow you to get a balance transfer at a lower interest rate than a cash advance; for example, 0% interest for 12 months plus a fee of 3%-4% of the amount of the advance. Issuers may allow you to deposit these funds into your bank account. However, it can take up to two weeks to process a transfer, so it won’t be as fast as a cash advance.
When to Consider a Business Card Cash Advance
There are times when this financing option makes sense:
- You need cash quickly for a short-term need, and less expensive sources of financing aren’t available.
- You have a critical need for short-term financing and will have trouble qualifying for other financing options.