What is Credit Card Cash Advance? Feature, Advantages, Disadvantages, and More

Cash advance from credit cards is a useful but expensive cash option. Individuals and businesses can gain valuable cash from the credit card advance.

It provides an emergency cash buffer for both individuals and businesses. However, it is more expensive as it comes with high-interest rates and transaction fees.

Working Mechanism of Credit Card Cash Advance

There are no additional requirements or approvals for a credit cash advance. The facility comes embedded with any credit card.

Business credit cards allow cash withdrawals through ATMs and bank counters. You can withdraw cash up to the credit card limit.

In some cases, the credit card issuers may put covenants for maximum limits. Usually, the cash advance limits are allowed as much as the credit card limit itself.

However, as it charges for high-interest rates and transaction fees, some issuers may lower the cash advance limits.

Refurbishment of the credit card cash advance works similar to the repayments of other credit card transactions.

You’ll repay in installments with the minimum due amount, or can restore the full limit with a lump sum repayment.

Important Features of Credit Card Cash Advance

Certain features differentiate the credit card cash advance from other short-term bank loans. Although, by and large, it works as a fast cash loan for businesses.

Small businesses in particular can get valuable cash advance in the absence of a revolving credit facility or a payday loan.

Here are some key points to consider with credit card cash advance.

1) The Total Cost

Credit cards inherently come with high-interest rates as much as 30%-40% in some cases. The average APR with credit cards remains around 20% in the US for the year 2020. Cash advance from credit cards incurs additional interest rate charges.

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It means the total APR for a cash transaction will be credit card interest rate + additional interest cost for a cash transaction.

Additional transaction fees and charges also make it an expensive option. Lenders charge around 3% transaction fees on cash advances from credit cards.

The total cost of a cash advance with a credit card is significantly higher than other short-term financing options.

2) No Additional Approvals

Once you are approved for a business credit card, you do not require additional approvals to utilize the cash advance feature.

The only covenant here is the restriction on cash limits with some lenders. For this reason, it presents a fast solution to businesses as short-term financing.

3) Cash Advance Limits

Usually, the lenders would allow you to withdraw cash advance equal to the approved credit card limits. There are high-interest rates, transaction costs, minimum charges, and the total APR changes with cash withdrawals.

Hence, some banks may put covenants on maximum cash withdrawals to keep the credit facility within the total limit.

4) Impact on Personal Credit

Business credit facilities can have an impact on your personal credit score as well. Small business owners with unlimited liability are vulnerable to such risks.

Some credit agencies may also check the business credit scores when appraising your personal credit profile.

Revolving credit facilities incur high-interest rates and are often unsecured forms of loans.

Hence, credit agencies consider such facilities risky. A business credit card cash advance can also impact your business credit score.

Late repayments and high utilization rates are other important factors that can impact your credit score while using the cash advance feature.

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Advantages of Credit Card Cash Advance

Managing cash flow and other working capital prove critical for any business. Small businesses in particular struggle with cash flow management.

Short-term financing options offer valuable cash buffer to these businesses.

A credit card cash advance also comes with certain advantages.

  • It provides an immediate cash solution.
  • It is a fast and readily available cash option, unlike other loans that need approvals.
  • It can help maintain the short-term liquidity and working capital needs of a business.
  • It can be used as an alternative short-term financing source.
  • It does not require collateral as the option comes embedded with credit card approval.

Disadvantages of Credit Card Cash Advance

A credit cash advance provides a useful emergency cash solution for businesses. However, it comes with certain costs and drawbacks.

  • It adds additional costs to the already high-interest rates with credit cards.
  • The transaction fees and minimum charges can add up to higher total costs.
  • It can impact business and personal credit scores.
  • High-interest rates make the repayments difficult that can lead to a vicious debt cycle for your business.

A credit card cash advance should be used in emergency cash needs ideally. It allows businesses to meet their urgent cash needs such as accounts payables.

However, the higher costs make it one of the most expensive short-term financing options.