Merchant cash advance credit card loan

5 Ways to Use a Cash Advance: Small Business Edition

3 min read • Aug 31, 2022 • Barry Eitel

Cash advances are a popular lending product among small businesses, especially newer and smaller operations. Functionally, a cash advance for a business is similar to personal cash advances, except the business borrower receives an advance on future business income rather than anticipated, personal income. 

You can use a cash advance in many ways. In some cases, a business might be dealing with an emergency, and a cash advance can mean the difference between staying open and shutting the doors. In other cases, a cash advance might help a business capitalize on a sudden opportunity for expansion. However, there are a few things to know before proceeding.

Is a Cash Advance a Loan?

A cash advance is not technically a loan: it is an advance on future income. Because of this, cash advances often have a short turnaround time from application to approval—sometimes small businesses can receive funds in as few as 24 hours. This speed is part of the appeal of a cash advance.

What Should You Expect When Applying for Cash Advance?

Cash advances are repaid via automatic deductions associated with daily credit card sales. The application process is pretty simple and straightforward, but the applicant will be expected to show the small business’s ability to make consistent credit card sales in the form of months’ worth credit card receipts.

While a cash advance may be offered in amounts ranging from $5,000 to $200,000, it does have higher interest rates starting as low as 18%. Remember, however, that collateral isn’t required for a cash advance.

How Can You Use a Cash Advance?

Unlike an equipment loan or another use-specific financing product, a cash advance can be used at the discretion of the business owner. Here are a few examples of when a cash advance can come come in handy:

1. Avoid a Cash Crunch

A cash crunch—when cash outflow exceeds cash inflow—can be disastrous, like when an unexpected bill depletes the reserves to pay employee wages or rent. A cash advance’s fast approval process can serve as a quick fix.

2. Shore Up Inventory

Cash advances are popular with businesses in the beverage and restaurant space, as well as retailers, because they can be used to buy inventory, which is especially useful for businesses with busy/slow periods throughout the year.

3. Operate Seasonally

For businesses that operate only on a seasonal basis, applying for a cash advance before the start of the busy season can ensure the availability of funds on-hand to run at full steam from day one.  

4. Handle Unexpected Crises

Beyond cash crunches, a cash advance can help a business overcome costly problems, like an equipment failure. Once approved for a cash advance, a small business can receive funds quickly and take on issues that might not have been affordable otherwise.

5. Seize New Opportunities

Finally, a cash advance can help a small business leap into expansion opportunities that require funds beyond what’s currently on hand. Being able to take on opportunities as they appear can be a boon to business growth longer term—and the speed of a merchant cash advance can help facilitate them.

 

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.

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Barry Eitel

Barry Eitel has written about business and technology for eight years, including working as a staff writer for Intuit's Small Business Center and as the Business Editor for the Piedmont Post, a weekly newspaper covering the city of Piedmont, California.