Common Terms and Conditions when Applying for a Small Business Cash Advance

When you own a business, you will get numerous offers for a small business cash advance through the mail. These lenders are willing to extend you financing with little to none diligence because they stand to gain a lot from making the loan. The cost of a cash advance is very high, but the risk to the lender is fairly low because of how the terms and conditions are set.

Business Assets as Collateral

Lenders typically extend cash advances based on some form of collateral. Most business lenders will want to use a business asset or a portion of the equity in your business as collateral on a cash advance. On one hand, this can make the loan cheaper, and it is a good way to put your equity to work for you. On the other, you will be the one taking the risk if you do default on the loan. To minimize this risk, watch your loan limits closely, and do not overextend yourself to get a large loan. It is best to avoid using personal assets, such as your home, as collateral on a business loan. If you do, both your business and your personal finances could be at risk if you default.

Repayment Date vs. Installments

Traditional, long-term business financing uses an installment system to repay debts. This means you will pay a portion of the debt back, plus interest, each month or installment term. When you take a cash advance, pay close attention to the terms of repayment. You may be asked to repay the entire debt all at once. This financing is popular for business owners who need the cash to secure a contract or sale and then repay the debt once the sale has been completed. Unfortunately, business deals do fall through, and you can still be on the hook for the entire lump sum.

Preclusion of Other Debts

Businesses taking very large cash advances may be precluded from taking on other debts until the loan is repaid. A lender reviews your current debt when the lender is considering the limits of any loan. If you take a number of additional debts after you have secured the cash advance, you could default on the initial cash advance due to the burden of repaying the debts. To stop this from happening, a lender will build in terms limiting the amount of additional debt you can take until the loan is repaid.

Financing Fees

Beware of additional fees applied to cash advanced beyond a standard interest rate. Cash advance lenders may charge a very high loan origination fee, which should never be more than 3 percent of the total limit of the loan. You should not have to pay an upfront fee to become a "member" of a credit union or lending company. This is a sign of predatory lending. Ask about the fees that would be applied if you are late on your payment. Though it is illegal to not disclose these fees, many lenders will bury them deep within the loan contract. They can greatly increase the expense of the loan.