Cash Advance: Meaning, Types, Benefits, Applications, and More

Cash advance is a versatile credit tool that serves as a financial cushion for many, offering quick access to funds when needed the most. This comprehensive blog post will help us learn about Cash Advance, empowering new-age businesses to secure short-term loans from banks, NBFCs & fintechs. Learn about common usage scenarios, available options, pros & cons along with key things to consider & look out for while availing this loan facility.

What is cash advance?

A cash advance is referred to as a short-term loan issued by a bank or a credit lender. It can also be defined as the process by which credit card holders withdraw an amount of cash against their available credit balance.

Cash advances are a highly attractive, short-term financing option for borrowers because approval and disbursement take very little time. However, the fee and interest payable are directly proportional to the size of one’s withdrawal and repayment tenure.

Types of cash advance

There are several types of cash advances in the market, each designed to meet different financial needs of businesses and individuals. Here are some common types:

1. Credit card cash advance

Credit card cash advances refer to a financial transaction in which a borrower obtains funds from a credit card, typically in the form of cash. This process allows businesses to access immediate liquidity by borrowing against their credit card’s available credit line. In credit card cash advances, businesses can get cash equivalent, generally up to 20% or 30% of the available credit limit. However, certain credit cards allow borrowers to withdraw even 50% of the available credit limit.

How credit card cash advances work:

• Over-the-counter transactions: Some financial institutions may allow businesses to obtain cash advances through over-the-counter transactions at a bank or financial institution.
• ATM withdrawal: Business owners can withdraw cash from an ATM using their business credit card, similar to how individuals withdraw cash using personal credit cards.

Features of credit card cash advances

• Cash advance fee: Credit card cash advances typically incur a one-time upfront fee, expressed as a percentage of the total amount advanced or as a flat fee.
• Transaction fee: In addition to the cash advance fee, there may be additional transaction fees associated with obtaining cash through an ATM or over-the-counter.
• Higher interest rates: Interest on credit card cash advances tends to be higher than the interest rates for regular credit card purchases.
• Immediate accrual: Interest starts accruing immediately from the date of the cash advance, with no grace period.
• Limited withdrawal amount: The amount that can be obtained as a cash advance is often limited to a percentage of the overall credit limit.
• Affects available credit: The amount of the cash advance is subtracted from the available credit limit, potentially impacting the business’s ability to make other purchases.
• Short-term nature: Cash advances are typically short-term loans, and repayment is expected within a relatively brief period.
• Minimum monthly payments: Businesses are required to make minimum monthly payments, and the outstanding balance accrues interest until fully repaid.
• Flexibility in use: Unlike some other forms of business financing that may have specific purposes, credit card cash advances offer flexibility in how the funds can be used for various business needs.

Pros and cons of credit card cash advances

Credit card cash advances come with both advantages and drawbacks. On the positive side, they provide quick access to cash in situations where alternative forms of payment may not be accepted. They can be convenient for handling emergencies or unexpected expenses. Additionally, credit card cash advances often don’t require a separate application process, making them readily available to those with an eligible credit card. However, high cash advance fees, immediate addition of interest, sacrificing of safety and consumer protection, and low cash advance limits are some of its limitations.

Do’s and Don’ts while using credit card cash advances

Using credit card cash advances can be a convenient way to access funds in certain situations, but it’s important to be aware of the associated costs and potential pitfalls. Here are some do’s and don’ts when using credit card cash advances:

Do’s:

• Familiarise yourself with the terms and fees associated with credit card cash advances. Know the cash advance APR, transaction fees, and any other costs.
• Reserve credit card cash advances for genuine emergencies. It’s not an ideal method for routine or unnecessary expenses due to the high costs involved.
• Aim to pay off the cash advance balance as soon as possible. Interest begins accruing immediately, so the longer you carry the balance, the more it will cost.
• Consider your credit limit before taking a cash advance. Ensure that the amount you’re withdrawing won’t push you close to or over your credit limit, as this can affect your credit score.
• Before taking a cash advance, check if your credit card issuer has any special promotions or offers, such as lower fees or promotional interest rates.
• Keep a record of your cash advance transactions, including the amount, date, and any fees. This will help you stay organised and aware of your financial obligations.
  Don’ts:

Don’ts:

• Don’t use credit card cash advances for non-emergency, discretionary spending. The high costs make it an expensive method for routine purchases.
• Don’t ignore the fees and interest rates associated with credit card cash advances. These can be significantly higher than the rates for regular credit card purchases.
• Don’t rely on credit card cash advances as a regular source of funds. It can lead to a cycle of debt and financial instability.
• Don’t forget that interest starts accruing immediately upon taking a cash advance. Unlike regular credit card purchases, there is typically no grace period.
• Don’t take a cash advance that exceeds your ability to repay. Be realistic about your financial situation and only borrow what you can comfortably afford to pay back.
• Don’t neglect the potential impact on your credit. While a single cash advance may not significantly harm your credit score, a pattern of using them excessively might.

2. Merchant cash advance (MCA)

A Merchant Cash Advance (MCA) is a form of business financing where a business receives a lump sum amount of capital upfront in exchange for a percentage of its daily credit card sales, plus a fee. This type of financing is particularly common in industries where credit card transactions are a significant part of the business, such as retail or hospitality.

How merchant cash advances work

• Advance amount: The lender provides a business with a lump sum of cash upfront. The amount is based on the business’s average daily credit card sales. The lender will check your credit card receipts to analyse how much exactly you need and how much you will be able to pay back easily. You will be required to sign a contract with the MCA lender, which will comprise all the details regarding how much cash you’ll receive and the interest rate.
• Repayment structure: Instead of fixed monthly payments, repayment is structured as a percentage of the business’s daily credit card sales. This is usually referred to as the “holdback” or “retrieval rate.”
• Daily or weekly payments: The business agrees to remit a fixed percentage of its daily or weekly credit card sales to the MCA provider until the advance, plus fees, is fully repaid. This means that if sales are high, the payment amount is higher, and if sales are low, the payment is lower.
• Factor rate: The cost of the MCA is often expressed as a factor rate rather than an interest rate. The factor rate is a multiplier applied to the advance amount to determine the total repayment. For example, if the factor rate is 1.3, the total repayment will be 1.3 times the amount of the cash advance.

Features of merchant cash advance

Merchant Cash Advances (MCAs) have distinct features that differentiate them from traditional loans. Here are key features of merchant cash advances:

• Short repayment period: MCAs have relatively short repayment terms compared to traditional loans. The entire advance, along with fees, is usually repaid within a few months.
• High fees and costs: MCAs are known for their high fees and costs. The factor rate can result in a high effective Annual Percentage Rate (APR), making them a more expensive form of financing compared to traditional loans.
• Quick approval and funding: One of the main advantages of MCAs is the speed of the approval and funding process. Businesses can often obtain funds quickly, making them suitable for urgent financial needs.
• No collateral required: MCAs are unsecured, meaning they typically do not require collateral. Instead, the repayment is based on the business’s future credit card sales.
• Flexible repayment structure: The repayment structure is flexible, aligning with the business’s daily cash flow. This can be advantageous during slow sales periods but may pose challenges during busy seasons.
• Accessible to businesses with varied credit histories: MCAs are often accessible to businesses with lower credit scores or limited credit history. The main consideration is the business’s daily credit card sales.
• Use of funds: Businesses can use the funds from MCAs for various purposes, such as working capital, inventory purchases, or addressing short-term financial challenges.
• Not reported to credit bureaus: MCAs are typically not reported to business credit bureaus, so they may not directly impact a business’s credit score.

Pros and Cons of merchant cash advances

The most important benefit of an MCA is that it helps business owners access cash quickly for financial emergencies. If you’re considering a merchant cash advance, you don’t have to worry about maintaining a high credit score, collateral, or guarantors. On the other hand, a high payback amount will be harmful if your sales aren’t going great. Moreover, the fact that MCAs are unregulated has led to higher interest rates on payback amounts than a bank loan.

Do’s and Don’ts when using merchant cash advances

When considering and using Merchant Cash Advances (MCAs), it’s important to be aware of certain do’s and don’ts to make informed decisions and avoid potential pitfalls. Here are some key considerations:

Do’s 

• Thoroughly review and understand the terms of the MCA agreement, including the factor rate, holdback percentage, and any additional fees.
• Evaluate your business’s cash flow to ensure that you can comfortably handle the daily or weekly repayments based on your credit card sales.
• Explore and compare MCA options with other forms of financing, such as traditional loans or lines of credit. Consider the total cost of capital and repayment terms.
• Have a clear plan for how you will use the funds. Ensure that the MCA is used for purposes that will contribute to the growth or stability of your business.
• If possible, negotiate the terms of the MCA. Some providers may be open to adjusting the factor rate or other terms based on your business’s financial health.
• Be aware of any regulations governing MCAs in your jurisdiction. Stay informed about industry practices and changes in regulations that may affect your agreement.

Don’ts 

• Don’t overlook the total cost of capital associated with the MCA. The factor rate and fees can make the advance more expensive than other financing options.
• Don’t use MCAs for long-term debt or ongoing operational expenses. They are best suited for short-term, specific needs.
• Don’t disregard the potential impact of MCAs on your business’s cash flow. The daily or weekly payments can affect your ability to cover other operational expenses.
• Don’t sign an MCA agreement without legal review. Ensure that you understand the legal implications of the contract and seek professional advice if needed.
• Don’t assume that all MCAs have the same terms. Different providers may offer varying terms, so it’s crucial to shop around and compare offers.

3. Payday loans

Payday loans are short, high-interest loans tied to your earnings, with the loan amount typically corresponding to a portion of your upcoming salary.

How payday loans work

Payday loans typically work in the following way:

• Application: To obtain a payday loan, an individual completes a loan application, providing personal and financial information. This often includes proof of income, such as pay stubs or bank statements.
• Loan amount determination: The lender determines the loan amount based on the borrower’s income, with the loan usually representing a percentage of the individual’s upcoming pay check.
• Post-dated check or authorisation: The borrower writes a post-dated check for the full loan amount, including fees, or provides authorisation for the lender to electronically withdraw the funds from their bank account on the due date.
• Approval and funding: If approved, the borrower receives the loan amount in cash or as a deposit into their bank account. This process is often quick, providing immediate access to funds.
• Due date: The borrower is required to repay the loan in full on the due date, which is typically their next payday. The due date is determined by the borrower’s pay schedule.
• Fees and interest: Payday loans come with high fees and interest rates. The fees are often calculated as a fixed amount per borrowed dollar. The annual percentage rates (APRs) for payday loans can be significantly higher than those of traditional loans.
• Repayment: On the due date, the borrower must repay the loan in full. This is usually done by allowing the lender to cash the post-dated check or by ensuring that sufficient funds are available in the borrower’s bank account for an electronic withdrawal.
• Rolling over the loan: If the borrower is unable to repay the loan on the due date, they may have the option to roll over the loan by paying additional fees. This extends the repayment period but increases the overall cost of the loan.
• Cycle of debt: Some borrowers may find themselves in a cycle of debt, repeatedly rolling over payday loans and incurring additional fees. This can lead to financial challenges and long-term dependence on high-cost borrowing.

Features of payday loans

While payday loans can be convenient in certain situations, they come with specific features that borrowers should be aware of:

• Small loan amounts: Payday loans typically offer relatively small amounts of money. However, it is a quick form of borrowing to cover immediate, small financial needs.
• Short-term repayment period: Payday loans have a short repayment period, usually due on the borrower’s next payday.
• High interest rates: Payday loans often come with high annual percentage rates (APRs), making them a more expensive form of borrowing. 
• Quick approval process: Payday loans typically have a quick approval process, with minimal documentation and credit checks.
  • No collateral required: Payday loans are unsecured, meaning borrowers are not required to provide collateral to secure the loan.
  • Income verification: Lenders usually require proof of regular income, such as a pay check or income statement, to ensure the borrower’s ability to repay. Borrowers need a stable source of income to qualify for a payday loan.
  • Access to borrowers with limited credit history: Payday lenders may be more lenient on credit history requirements, making these loans accessible to individuals with limited or poor credit.
  • Automatic withdrawals: Repayments are often set up as automatic withdrawals from the borrower’s bank account on the due date.
  • Renewal and rollover options: Some payday loans offer renewal or rollover options, allowing borrowers to extend the repayment period by paying additional fees.
  • State regulations vary: Payday loan regulations vary by state, affecting the terms, interest rates, and fees associated with these loans.

Pros and cons of payday loans

One significant advantage of payday loans is the quick access to funds. It involves a straightforward application process with minimal documentation. However, the high interest rates associated with these loans can lead to a cycle of debt for borrowers who struggle to repay on time. Additionally, the automatic withdrawal setup for repayments can catch borrowers off guard if they haven’t budgeted for the deduction.

Do’s and don’ts while using payday loans

Do’s 

• Thoroughly understand the terms, including interest rates and fees associated with the payday loan. Be aware of the total repayment amount.
• Borrow only the amount necessary to cover immediate expenses. Avoid taking out more than you can comfortably repay on your next payday.
• Explore alternative financial options, such as personal loans from banks or credit unions, before opting for a payday loan.
• Be aware of payday loan regulations in your state. Regulations can vary, affecting interest rates, fees, and the maximum loan amount.
• Have a clear plan for repaying the loan on time. Ensure you have sufficient funds in your account on the due date to avoid additional fees.
• Verify that the payday lender is licensed and operates within the legal framework. Be cautious of predatory lenders or scams.
• Reserve payday loans for genuine emergencies and unforeseen expenses, rather than using them for routine or non-essential spending.

Don’ts

• Don’t rely on loan renewals or rollovers frequently. This can lead to a cycle of debt with accumulating fees and increased financial stress.
• Don’t neglect your repayment responsibilities. Ensure you have budgeted for the loan repayment and have the necessary funds available on the due date.
• Be wary of lenders that impose exorbitant fees, unrealistic interest rates, or unconventional terms.

Which cash advance is best for my business? 

Choosing the best cash advance for your business depends on various factors, such as your businesses’ financial situation and nature. Here are some common considerations:

Please note: While payday loans are an option for obtaining quick cash, they are generally not recommended for businesses due to several reasons. Payday loans are typically designed for individuals and are known for their high costs and short repayment terms.

Pros and Cons of Cash Advance 

In this section, we will explore the pros and cons of cash advances, examining the benefits of quick access to funds, convenience, and accessibility, as well as the potential downsides such as high fees, interest rates, and the risk of entering a cycle of debt. 

Pros of cash advance

• Immediate access: Cash advances provide easy and quick access to funds, which can be crucial in emergency situations.
  
• Convenience: If you have a credit card, obtaining a cash advance can be convenient as it often involves a simple transaction at an ATM.
  
• No collateral required: In the case of cash advances, you typically don’t need to provide collateral, unlike some other forms of loans.
  
• Highly accessible: Some forms of cash advances may be accessible to businesses with poor credit or no credit history.

Cons of cash advance

• High fees: Cash advances often come with high fees, including upfront transaction fees and additional finance charges. The fees can make the cost of borrowing significantly more expensive than other forms of credit.
  
• High interest rates: Interest on cash advances tends to be higher than the interest rates on regular credit card purchases. The interest starts accruing immediately, with no grace period.
  
• Limited amounts: The amount you can borrow through a cash advance is often limited, and it may not meet substantial financial needs.
  
• Not a long-term solution: Cash advances are not designed for long-term financial solutions. Relying on them regularly can lead to financial instability and make it difficult to manage your overall finances.

Things to keep in mind while using cash advance

When businesses consider using cash advances, whether through credit cards, merchant cash advances, or other means, it’s important to keep several key factors in mind to make informed decisions and manage their financial well-being effectively. Here are some important considerations for businesses using cash advances:

1. Cost of capital: Understand the total cost of the cash advance, including fees, interest rates, and any other associated costs. Compare these costs to alternative financing options to ensure cost-effectiveness.

2. Terms and conditions: Read and understand the terms and conditions of the cash advance agreement. Pay attention to repayment terms, fees, and any other contractual obligations.

3. Impact on cash flow: Consider how the cash advance will affect your business’s cash flow. Evaluate whether the repayments align with your revenue cycles to avoid putting unnecessary strain on your finances.

4. Purpose of the cash advance: Clearly define the purpose of the cash advance. Whether it’s for inventory, equipment, or working capital, having a specific and justifiable purpose can help ensure that the funds are used strategically.

5. Alternative financing options: Explore alternative financing options, such as lines of credit or invoice financing. Compare the terms and costs to determine the most suitable option for your business needs.

6. Repayment plan: Develop a realistic and well-thought-out repayment plan. Ensure that your business can comfortably meet the repayment obligations without negatively impacting daily operations.

7. Credit impact: Understand the potential impact of a cash advance on your business credit. While some forms of cash advances may not directly impact your credit score, it’s important to be aware of any potential implications.

8. Regulatory compliance: Be aware of any regulatory requirements or restrictions associated with cash advances. Some jurisdictions have specific regulations governing lending practices, and non-compliance can lead to legal issues.

9. Merchant cash advances (MCAs): If considering MCAs, understand the factor rate and how it differs from an interest rate. Factor rates are a different way of expressing the cost of capital and can be higher than traditional interest rates.

10. Long-term viability: Consider the long-term viability of your business. Relying too heavily on cash advances, especially high-cost options, may not be sustainable in the long run.

By carefully considering these factors, businesses can make informed decisions about whether to pursue a cash advance and choose the option that best aligns with their financial goals and overall business strategy.

Also read: Top 8 Ways to Grow Your Business With Razorpay Cash Advance

To sum up…

You can always opt for a cash advance when you need funds on an urgent basis. However, you need to have a thorough understanding of your requirements before you decide on the option. Don’t forget to read the terms and conditions before getting into any agreement with the lender.

Did you know?

If you wish to apply for Cash Advance, Razorpay will approve your application in under 3 days so that you can borrow money instantly in future whenever you need it at a nominal fee. Once Cash Advance is enabled, you can withdraw money, repay and borrow again from the approved credit limit.

Don’t run out of cash and don’t stop growing! Access Razorpay Cash Advance and enjoy uninterrupted growth.

Frequently Asked Questions

Q1: How easy is it to get a cash advance?

Ans: It’s fairly simple to get a cash advance because lenders don’t check the borrowers’ creditworthiness to sanction these loans. When business owners need immediate funds, they can opt for this financing option, which doesn’t even require one to submit collaterals.

Q2: What is a cash advance fee?

Ans: A cash advance fee is applied each time you make a cash withdrawal with your credit card. Generally, it falls within the range of 2.5% to 3% of the transaction value, with a minimum charge of Rs 250 to Rs 500. The fee will be indicated on your billing statement.

Q3: How should cash advances on credit cards be ideally paid off?

It’s advisable to pay off credit card cash advances as soon as possible. Try to repay the lender on the same day you withdraw the amount. This is because the amount starts accruing interest from the day you have made a transaction.