Should my business use a credit card cash advance in a cash crunch?

In a financial emergency, some small businesses may consider a credit card cash advance as a source of quick funding. A credit card cash advance is easy to get–you can go to an ATM or a bank with your card, and walk out with cash. That makes it the default choice in an emergency, even if it isn’t a very good choice.

But credit card cash advances are a lot like the wolves in some fairy tales–they’re in disguise. Cash advances through your card come with limits on how much you can take out, steep fees, and high interest charges. They have their place, but they shouldn’t be your first choice for fast cash. Since there are better ways to solve cash flow emergencies, you may want to avoid adding to your credit card debt if you can.

Before you decide if a credit card cash advance is right for you, consider what it will cost and whether you have better options.

You can get a credit card cash advance in a couple of ways. You can use your credit card with a PIN to withdraw cash from an ATM. Or, you can go to a bank in your credit card’s network. You may also pay a fee to the bank or ATM owner for the use of their facility.

With many credit cards, you can’t draw your whole credit limit in cash. The limit is often a few hundred dollars. For many businesses, that isn’t very useful.

No matter how often you visit the ATM, or how small your withdrawal, each time you use a credit card to pull out cash, you’ll have to pay a fee. The fee will be a percentage of the amount you take out, such as 3%, or a flat rate, such as $10–usually whichever is higher.

Banks add interest on top of the fee. Worse, the interest rate on cash advances is often higher than the rate on regular purchases. There’s no grace period, so you start owing interest the day you withdraw the money.

Credit Card Cash Advances Are Very Expensive

With such high fees and interest, credit card cash advances can add a lot of money to the amount of cash you take out.

There are no fees for using a credit card to buy goods and services straight from a store or vendor. With a cash advance, the bank, the ATM owner, and the credit card issuer can each take a share of the cash you’re taking out, which combined can be $10 or more.

Another reason cash advances are so expensive is that they cost more interest than most credit card purchases. Most cards charge an annual interest rate somewhere between 10% and 25%, or an APR. Cash advances are often charged at higher rates, often over 25% APR.

A credit card purchase can be repaid over several weeks, with no interest at all. Even if you repay a credit card purchase late, after you’ve lost its interest-free grace period, it will likely still cost less than a cash advance.

Let’s take a closer look and see.

Say you need to make a cash advance for $300. You use your Chase Ink Business Preferred card to take out $300 in cash at an ATM.

• Purchase: $300
• Out-of-network ATM fee: $2.50, assumed here
• The card issuer’s minimum cash advance fee, $15 in this case
• Interest: $4.68 to repay after 21 days, at a 26.99% interest rate

Say instead that you could have bought $300 in goods and services using your credit card instead of withdrawing the cash.

• $300 purchase
• no fee
• Interest: $0, assuming it’s paid within the 21-day grace period
• Total cost: $300

Even on a small purchase, the price of a credit card cash advance becomes obvious. On a $300 purchase, the cash advance fee and interest can add up to over $20 more than a regular purchase.

But today, credit cards are so widely used, you’ll almost never need to get cash to make a purchase. You may never need a cash advance at all.

Reduce the Cost of a Credit Card Cash Advance

A credit card cash advance may be useful if you have no other source of quick cash, but it is almost always a bad idea.

If you have an international bank, or are traveling abroad, you may run into situations where your account is frozen or you can’t use your credit card abroad. If you can’t reach your bank, your credit card cash advance might be the only way to cover expenses. If a plumber fixing your office doesn’t take credit cards, and your checkbook doesn’t have funds, you may have no choice but to use your card for cash.

If your only options are closing your doors or taking a cash advance, and you can be sure you can pay it back quickly, then a credit card cash advance can be used.

So in a financial emergency, a cash advance might be unavoidable. If it is, use these tips to try and reduce the cost.

The best way to keep the cost under control is to take out only as much cash as you can comfortably repay. Taking out more cash than you can afford will cost you, as the interest on a cash advance can pile up.

One way to reduce the cost of a credit card cash advance is to repay it as soon as possible. Cash advances often carry a higher interest rate than normal purchases, so in this case your interest charge goes up faster than normal. The longer you take to pay back a credit card cash advance, the more you pay in interest.

Alternative to a Credit Card Cash Advance

A short-term business loan, instead of a cash advance, can be a good option for you. If the emergency doesn’t need a cash payment today, a short-term loan may help solve your cash-flow problems. They’re usually a lump sum you agree to repay over a fairly short period.

Short-term loans are easier to get, especially for businesses with a less than perfect credit score. They can help improve your credit, which matters a lot to a small business.

If your business frequently runs into cash emergencies, you may want to consider a business line of credit. It offers you a set sum of money you can draw from whenever you need, instead of using credit card cash advances.

A business line of credit is designed to be revolving–you draw cash as you need it, and repay it over time. You can use some of the credit line, repay that amount, and draw on it again and again. Each repayment might be monthly or at some other set interval, and each draw accrues interest.

Shop around before choosing a business line of credit.

Still, you may have found it hard to get a loan from a bank. Maybe you don’t meet the business size requirements, or you aren’t in business long enough.

If your personal credit history is good, you may be able to apply for a loan as an individual to use for your business. You should keep your personal credit strong to get the best rates and terms. There are some free online tools that let you check your personal credit report.

Take your time when shopping for a personal loan, as you would when applying for a business loan.

It can be tempting to take a cash advance to resolve financial problems, but because of the high fees and interest, a credit card cash advance is not a great solution. There are likely better ways to solve your cash needs. If you can pay off the advance quickly, and your emergency is unusual, a credit card cash advance can help save the day. But as a first choice, credit card cash advances are rarely the best option.