What are the risks of cash advances?

Cash advances can be a great way to get funding for your business, but there are some risks to consider before you take one out.

What are the risks of cash advances?

People who request cash advances are more likely to fail to pay their credit card debt than people who don't. That's one of the reasons interest rates on cash advances are higher. It could also put you at greater risk of falling behind on your credit card payments. Another common form of cash advance is the short-term payday loan that you've probably seen advertised on television.

With a payday loan, you pay the lender an upfront fee and write a post-dated check to cover the loan amount, which normally matures in about two weeks. If you can't cover the check, the lender will charge additional fees and interest on the balance. Some lenders will allow you to renew the balance for another two weeks, but that only leads to additional fees. Before you know it, you're in a debt trap that's hard to escape from.

As noted above, a cash advance generally has a high interest rate. If this affects your ability to pay monthly charges on time, it could also affect your credit score. And if the cash advance places you above the card's credit limit, your credit score may be diminished. Even after you pay the balance, your credit report will show the highest reported balance and other potential lenders will see that you exceeded the limit at any given time, which could impair your ability to get new credit.

Along with separate interest rates, credit card cash advances have a separate balance from credit purchases, but the monthly payment can be applied to both balances. Day recommends the Credit Research Foundation and the National Association of Credit Management as resources for small business owners who may be seeking expert advice on business credit and cash advances. Your card company will start charging compounded interest on a cash advance immediately, the same day you take the advance. Taking out a cash advance doesn't have a direct impact on your credit or credit rating, but it can affect you indirectly in several ways.

You may assume that because you have access to a cash advance when you need it, there is no need to set aside money for financial emergencies. But cash advances can be disastrous if the borrower is about to file for bankruptcy, needs to pay a credit card or other bills that have interest rates, or simply wants the money to buy more products. In most cases, credit card cash advances do not qualify for introductory offers with low or no interest rates. These cash advances generally also include a fee, either a flat rate or a percentage of the anticipated amount.

Cash advances aren't alarming when used infrequently, but they are, at best, short-term solutions to meet Cash advance providers know that businesses need more cash and are sometimes too willing to help. However, most cash advances don't have a grace period, and interest will start accruing the same day you make the advance. In addition, you will pay a higher interest rate for cash advances than when you use your card to purchase goods or services. If you find that you constantly need cash advances to pay your bills and make ends meet, this is a big red flag that you need help figuring things out and getting your finances back on track.

Cash advances generally have high interest rates and charges, but they are attractive to borrowers because they also offer quick approval and financing. You can see here that cash advances can act like a series of dominoes that can start to fall and potentially create a downward spiral that is difficult to get out of. .