Guide  

In an unpredictable financial landscape, gaining access to quick cash can feel like a lifeline. Whether you’re facing an urgent surprise expense, find yourself with reduced income, or have unexpected needs for a small business, there are lots of situations where you might need extra money right away. And if you know you can pay it back quickly, a cash advance could be an option to consider. 

Although cash advances might seem like a straightforward solution when your cash flow is tight, there are several advantages and disadvantages to consider before you make a decision. Understanding the cash advance pros and cons can give you a clearer picture of whether a cash advance is the right financial tool for your needs.

What is a cash advance?

A cash advance is essentially a short-term loan. It allows you to borrow money quickly, often through a credit card or a cash advance lender. Unlike traditional loans, cash advances do not require collateral or a lengthy approval process. Cash advances are meant to be a short-term bridge to a financial gap, as opposed to an ongoing money management strategy. 

There are different types of cash advances available. Each kind comes with unique terms and conditions tailored for specific needs, such as covering payroll for a business or managing unexpected life expenses. Three of the most common types of cash advances are:

• Credit card cash advances: A credit card cash advance lets you borrow against your credit card limit. You can generally use an ATM to get a credit card cash advance or request one at a bank. These cash advances typically come with a fee as well as higher interest rates than the rate for regular purchases. 

• Payday loans: These are typically short-term, high-cost loans for $500 or less with repayment due on your next payday. Payday lenders tend to charge high fees and may require you to guarantee repayment by letting them automatically withdraw money from your bank account on the due date.

• Merchant cash advances (MCAs): MCAs are cash advances for businesses. An MCA lender will let you borrow an upfront lump sum that your business repays using a percentage of your debit and credit card sales plus a fee. MCAs are generally a more expensive alternative to traditional small business loans.

Pros of taking a cash advance

Immediate access to funds

One of the biggest cash advance pros is the speed at which you can access funds. Unlike traditional loans that require an application that could take days or weeks to process, a cash advance can often be acquired within minutes. Credit card cash advances are both speedy and convenient, because you can usually get the money using an ATM. The quick and easy nature of cash advances make them an enticing option for those facing emergency expenses or immediate financial obligations that truly can’t wait.

No collateral requirement

Unlike some other types of loans, cash advances do not require you to put up any assets as collateral. This can be beneficial if you don’t have significant assets (like money in a savings account, real estate, or a car) or if you don’t want to risk your personal or business property. No collateral makes cash advances more accessible to more people.

Flexible repayment options

Among the cash advance pros is that many of them offer flexible repayment options. For instance, some payday lenders will let you break your repayment into installments, credit card cash advances let you pay off your debt over time with a minimum payment, and MCAs base repayment on a percentage of sales. But be careful, because some of the payment terms that seem like cash advance pros may turn out to be cash advance cons.

Cons of taking a cash advance

High fees and interest rates

Cash advances are notorious for their high fees and interest rates. The cost of borrowing this way can be significantly higher than other financing options, which can lead to paying back much more than the original amount borrowed. When you’re considering any kind of cash advance, look closely at the fees and interest rates, as the future financial impact could outweigh the convenience of immediate cash.

Potential impact on credit score

Using a cash advance can potentially impact your credit score, especially if you are unable to repay the borrowed amount quickly. High utilization of credit limits can lower your credit score, affecting your ability to secure future loans. And because cash advances often carry high interest rates, you may find your debt increasing so much that it’s hard to keep up with payments—and any late or missed payments will likely ding your credit score. 

Risk of falling into a debt cycle

The ease of obtaining a cash advance can lead to a cycle of debt. If not managed carefully, it's easy to find yourself in a position where taking another cash advance is necessary to pay off the previous one, leading to mounting financial pressure and difficulty getting out of debt. If you’re iffy about your ability to repay your cash advance promptly, you may be better off looking for other options. 

Who should consider a cash advance?

Cash advances might be suitable for individuals or businesses who find themselves in a temporary financial bind and are confident in their ability to repay promptly. Situations such as unexpected repairs, emergency medical expenses, the need to meet payroll, or other short-term cash flow issues might justify considering a cash advance. 

Because cash advances tend to have higher fees and interest rates than other forms of debt, it’s important to consider how urgently you need the money. For example, people who need to cover an essential expense within 24-48 hours might consider a cash advance, but those who can get by for a few days may want to explore less costly types of loans that take a bit more time to obtain. 

Before deciding, it's crucial to assess your financial situation honestly. Do you have access to alternative solutions for your cash flow needs? Can you realistically manage the repayment terms of a cash advance? If you’re not able to repay in the designated time frame, how will it impact your financial stability in the near and long term? Answering these questions can help determine if a cash advance is the right choice for you.

Alternatives to cash advances

As you’re weighing cash advance pros and cons, it may be wise to also explore other financing possibilities so you know all your options. You might look into things like:

• Borrowing money from friends or family members; they may also be willing to provide an interest-free loan and flexibility on repayment

• Applying for a personal loan; some lenders offer the possibility of same-day application processing and financing

• Applying for a line of credit at your bank; banks often offer credit lines with no fees and a more favorable interest rate for current customers 

• Seeking a small business loan or line of credit if you need cash to cover business expenses

• Exploring peer-to-peer (P2P) lending platforms, which offer options for businesses and some types of personal loans

Planning ahead to avoid cash advances

Of course, the best way to avoid the costs and risks of a cash advance is to avoid needing one in the first place. While that’s not always realistic, there are some things you can work toward to set yourself up for more effective cash flow management. Building an emergency fund can help you handle unexpected expenses without going into debt. Creating and sticking to a budget can empower you to reduce expenses and build up your savings to bolster your safety net. 

But sometimes life happens and you need extra money fast. Just remember to be aware of cash advance pros and cons, and consider using alternatives when you can.

Case studies and examples

Some real-life examples highlight how cash advance pros and cons could play out in various situations. 

Example #1: A freelancer might use a cash advance to help cover living expenses if their income dips one month due to a drop in projects or late payment from a client. This comes with the risk that the following month could also leave them with less income than expected. But if the freelancer is certain their income will bounce back within a month, a cash advance could tide them over without driving them into a cycle of expanding debt. 

Example #2: A small business owner might use a cash advance to cover payroll or key operational expenses during a slow season. While this strategy may temporarily help keep the business running, the financial risk is real. If revenue doesn’t increase fast enough to cover payroll, operations, and repayment of the cash advance during the next pay cycle, the business owner could wind up in an unwelcome debt cycle and greater financial stress. 

Example #3: An individual who is temporarily low on cash, doesn’t have a credit card, and relies on their car to get them to and from work may successfully take out a cash advance to cover an emergency vehicle repair. If this individual knows their next paycheck will cover their cash advance, fees, and essential living expenses, a cash advance could get them through a temporary tight spot. But they’d still run the risk of a shortfall (and mounting debt) if they lose income or have another unplanned expense during their next pay period.

Align cash advance pros and cons with your financial goals

Balancing cash advance pros and cons is essential to making an informed financial decision. While they offer immediate financial relief, the costs and risks of cash advances can be significant. Evaluate your situation carefully and determine how quickly you really need the money, how soon you can afford to pay back what you borrow, and whether alternative options might serve your needs. And if a cash advance seems like the right path for you, make a repayment plan now so you can reduce the burden of interest payments over time. Even when emergencies arise, understanding your options and planning wisely can ensure that any financial decision, including taking a cash advance, aligns with your long-term goals.