What it means
With a credit card, a cash advance means taking out cash at a machine or bank counter, or using a cheque or transfer that your card issuer treats as cash. Unlike a normal purchase, there is usually no interest-free period.
Interest starts the day you take the money. Card issuers also charge a cash advance fee, often a percentage of the amount with a minimum charge.
The interest rate on cash advances is frequently higher than the rate on purchases. Together, these costs make a cash advance one of the most expensive ways to borrow short term.
Cash advances typically have a separate, lower limit than your overall credit limit. They may also reduce the credit available for purchases.
Repayments are sometimes applied to lower-rate balances first, which can leave the expensive cash advance balance outstanding for longer. In business, the phrase has a second meaning.
A merchant cash advance is a lump sum given to a business in exchange for a share of future card sales until a fixed amount is repaid. Another common use is an advance paid to an employee or contractor for expected travel or project costs, which is later settled against receipts.
Because of the cost, finance advisers treat cash advances as a last resort. A short-term overdraft, a business line of credit or a supplier extension is usually cheaper.
If you must use one, repay it as quickly as possible. Regulations also shape how cash advances work.
In many countries, lenders must disclose the fee and rate clearly before you borrow, and some limit the amount you may take in a single day. Reading the card agreement is the quickest way to see the actual terms that apply to you.
In practice
Real-world examples
Example 1
A market trader needs $500 in cash to buy stock at a street auction and uses his credit card at a machine. He is charged a 4% fee of $20 straight away. Interest begins that day, so he repays the card within a week.
Example 2
A catering company receives a merchant cash advance of $30,000 and agrees to repay $36,000 from 10% of its daily card sales. The extra $6,000 is the cost of the advance. The owner compares this with a bank loan before signing.
Example 3
A consulting firm gives a manager a $2,000 travel advance before an overseas trip. After the trip, the manager submits receipts for $1,750 and returns $250 in cash. The finance team clears the advance in the ledger.
Think of it
A cash advance is money given before it's earned or spent-prepayment requiring later reconciliation.
Formula
Calculation
Total cost of a cash advance = Advance x Fee % + Advance x Annual rate x Days outstanding / 365
Worked example: a business owner takes a $1,000 cash advance on a credit card. The card charges a 5% fee and an annual rate of 25%, and the money is repaid after 30 days.
Step 1: Fee = $1,000 x 5% = $50.
Step 2: Interest = $1,000 x 25% x 30 / 365 = $20.55 (rounded).
Step 3: Total cost = $50 + $20.55 = $70.55.
The owner pays $70.55 to borrow $1,000 for one month, which is 7.06% of the amount. The fee alone makes the effective annual cost very high if the borrowing is short.Case study
Seen in the real world
Greenfield Bakery is an illustrative, fictional shop that faced an unexpected $4,000 repair bill on its main oven. The owner used a credit card cash advance to pay the repair firm the same day. The card charged a 5% fee, which was $200, and an interest rate of 28% a year.
It took the bakery three months to repay the balance, and the interest came to about $280 on top of the fee. The total cost was close to $480, or 12% of the amount borrowed. A small business line of credit at a lower rate would have cost a fraction of that.
The illustrative lesson is that speed has a price. Arranging a cheaper facility before an emergency happens is far better than paying for convenience afterwards. The owner now keeps a small cash reserve and an agreed overdraft, so the next surprise can be paid for at a much lower cost.
Watch out
Common mistakes
- Assuming a cash advance has the same interest-free period as a normal card purchase.
- Ignoring the upfront fee, which adds to the real cost even if the advance is repaid quickly.
- Believing that paying the card statement in full clears the cash advance first, when payments may be applied to lower-rate balances first.
Questions
People also ask
Do cash advances affect my credit score?
They can, as large balances increase your credit use, and frequent cash advances may signal financial stress to lenders.
What is a merchant cash advance?
It is a lump sum paid to a business in return for a fixed share of future card sales until an agreed total is repaid.
Is there a cheaper alternative?
Often yes, such as an overdraft, a personal or business loan, or a line of credit arranged in advance.
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