Cash advance

Definition

A cash advance refers to a financial service provided by banks, credit card companies, and some other financial institutions. It allows cardholders or account holders to withdraw a specific amount of money from an ATM or a bank branch using their credit card or debit card.

What is cash advance?

A cash advance is not the same as a loan. It’s essentially a short-term borrowing against the credit limit of a card, and the terms and conditions are specific to the credit card issuer. This withdrawal is typically a portion of the cardholder’s credit limit (in the case of a credit card) or a portion of the available balance (in the case of a debit card).

Some credit cards may have a separate cash advance limit, which may be lower than the overall credit limit. This is an important consideration to be aware of before attempting a cash advance.

A cash advance provides quick access to cash, which can be useful in situations where physical currency is needed urgently, such as when travelling or during emergencies.

Remember that cash advances can impact a business credit score negatively if not managed well, as they may indicate financial stress or reliance on short-term funding. Regularly using cash advances can suggest instability to lenders, potentially lowering the business’s creditworthiness and affecting future borrowing capabilities.

Cash advances usually come with high fees and interest rates. Unlike regular card purchases, which may have a grace period before interest accrues, cash advances often start accumulating interest immediately.

Taking a cash advance can lead to debt accumulation if not managed carefully. Due to the high costs associated with cash advances, it’s generally advisable to consider alternative options for obtaining cash, such as using a personal loan or savings.

Types of cash advances

• Credit card cash advance: Withdrawn from an ATM or over the counter using a credit card, typically with higher interest rates than regular purchases.
• Payday loans: Short-term loans repaid on the borrower’s next payday, often with high fees and interest rates
• Merchant cash advances: Advances given to businesses based on future credit card sales, repaid through a percentage of daily credit card transactions.
• Line of credit advances: Withdrawals from a line of credit, with interest accrued on the amount borrowed.
• Employee cash advances: Issued by employers to employees for business expenses, deducted from future pay checks.

Example of cash advance

Sarah is a credit cardholder with a $5,000 credit limit on her card. She has an unexpected expense and needs immediate cash.

Sarah decides to use a cash advance from her credit card. She visits an ATM and requests a cash advance of $500. Credit card companies typically charge a cash advance fee, which is a percentage of the total cash advance amount. Let’s say the cash advance fee is 5%.

In addition to the $500 cash advance, Sarah incurs a cash advance fee of 5% on the transaction. The total amount charged to her credit card account is $500 + (0.05 x $500) = $525.