Using Business Cash Advances

A business cash advance can be used to help meet a short-term funding need.  The cash advance may be secured against a receivable or another asset. The terms for these loans vary depending on the lender and provide a way for a business to access quick cash when needed.

Use of Business Cash Advances

The business cash advance may be a useful temporary resource. It should be noted that the interest rates for this type of borrowing will be higher than what is charged on other types of loans such as business credit lines or credit card borrowing.  Because of the higher charges and fees, a business should not come to rely on these types of loan over time as a regular way to meet needs.

The Need for Business Cash Advances

A cash need may arise for a business when its cash flow goes off cycle and its financial commitments are not in sync with its financial resources. This occurs, for example, when a business’ account payables come due before it receives payments. A business may request a cash advance against the receivables coming in, in order to meet its financial obligation and avoid fees and penalties associated with overdrafts and other fees.

Handling a Business Cash Advance

Cash advances used on an infrequent basis may be acceptable for some businesses that do not have access to other forms of lending or access to capital. Under these circumstances, using a business cash advance should be viewed as an emergency loan and should be paid back immediately with the available capital coming from  the receivables or pledged collateral.  Allowing the advance to be carried forward on the business’s books will result in higher interest charges and make the cash advance more costly to the business.

Alternatives to Business Cash Advances

A business may consider looking for other resources in place of a cash advance.  This can include a business line of credit, overdraft protection for the business and a commercial loan.  These resources should be less expensive for the business and allow it to retain the costs and fees associated with business cash advances. If a business is unable to qualify for other types of loans, a cash advance may be an only option.

Businesses should also have in place policies and procedures regarding the use of business cash advances. These procedures should include when to use a business cash advance, under what circumstances they are appropriate and what terms are acceptable for a loan. These procedures help protect the interest of the business and save it in costs and fees.