Business Loans

Pros and Cons of a Cash Advance

Dec 10, 2021 • 3 min read
Merchant cash advance for small business
Table of Contents

      Sure, you want to have more cash coming into your business than going out, but sometimes unexpected costs, situations, or even opportunities arise that can disrupt cash flow. One solution to keep cashflow steady in moments like these is a cash advance.

      What Is a Cash Advance?

      A cash advance is a financing option that helps a small business tap into its future earnings. But unlike a loan, which is paid back monthly (sometimes more frequently) with a set payment amount (installments of principal and interest), cash advances are repaid more frequently and repayment begins almost immediately upon receiving the financing with daily or weekly payments tied directly to income.

      Cash advances, which may also be referred to as ACH loans or advances, are often used by business owners to overcome financial slumps or slow periods or to overcome an unpredicted situation or opportunity. The funds can help stabilize cash flow through a short time period. They’re also similar to personal cash advances: both options are tied to future income.

      What Are the Benefits of a Cash Advance?

      Beyond the unique repayment options, business owners have other reasons to consider a cash advance

      • Speed of Funding. Cash advances are quick to fund and can often be funded within 24 hours of approval. So if your restaurant’s refrigerator breaks in the middle of the summer, a cash advance may literally save your bacon.
      • Not Tied to Collateral. Another reason to choose a cash advance is that no collateral is required. For business owners that don’t want to risk existing assets or that have little collateral, cash advances can be an appealing option.
      • Long Business History Not Required. Cash advances are appealing to newer businesses or businesses with a shorter financial history, although you may be asked to provide 4-6 months of bank statements, receivables, or daily sales records. 

      What Are the Drawbacks (Cons) to Cash Advances?

      Any funding source will have its pros and cons, which is why researching and understanding options available to your business is important. While ideal for many businesses and situations, a  cash advance does have limitations:

      • May Be Expensive. Cash advances are based on an interest rate. A high rate or longer repayment period due to low sales can result in an overall higher cost of financing. Before taking a cash advance or any funding option, compare it with the other funding options available to you.
      • Not Federally Regulated. Since cash advances are considered commercial transactions, they lack some of the regulations and requirements associated with other borrowing options.
      • Credit May Still Be Checked. While cash advances are often marketed to new businesses with little or poor credit, some financiers may check credit prior to approving the advance, which could impact the interest rate of the advance. It can also impact your credit score over time. If you’re just seeing what types of financing options are available to you, work with a marketplace like Lendio, which offers a single, online application that doesn’t affect your credit.

      Get to Know Your Funding Options 

      You have several ways to fund your small business, whether you need short-term cash to cover immediate costs or want to increase your working capital to make longer-term investments. Start your search process by exploring different options through Lendio, where a single application will reach up to 75+ lenders so your business’s specific funding needs are connected with the right financing options.


      Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.
      About the author

      Lendio's team of experts is here to help you with every nook and cranny of your business. We'll make sure you have the best advice for financing, operations, management, hiring, and much more.

      Share Article:

      Business insights right to your inbox

      Subscribe to our weekly newsletter for industry news and business strategies and tips

      Subscribe to the newsletter

      Subscribe to our weekly newsletter for industry news and business strategies and tips.