Understanding Cash Advances – Benefits & Credit Score Impact

In today’s fast-paced world, financial emergencies may arise unexpectedly. This can often leave both individuals and businesses in a tight spot, scrambling for funds. Although government schemes like the Pradhan Mantri Mudra Yojana (PMMY) may be able to solve the need for cash, getting it quickly may prove to be challenging. Here’s where cash/money advances may be able to help by providing you easy access to funds as and when you need it.

However, it is crucial to first understand what it is, the various types of of advances available, its benefits and drawbacks and its impact on your credit score before you even consider this financial option. Here’s a comprehensive guide to help you out.

What is Cash Advances?

Cash or equivalent money advances are short term loans that banks, credit card issuers and other financial institutions offer. Unlike merchant loans and other traditional options, they are much easier to obtain and have little to no paperwork or documentation requirements. That said, the interest rates and associated charges generally tend to be much higher than other financial options.

What are the Types of Money Advances?

Contrary to popular opinion, there are quite a few types of advances you can opt for depending on your requirements. Let’s quickly take a look at what they are.

1. Credit Card Advances

Credit card advances are loans that are issued against your card’s credit limit. Most credit card issuers set sub-limits for advances to prevent users from overborrowing. Generally, issuers limit advances to about 30% of the overall credit limit, meaning that if your credit limit is ₹1 lakh, the maximum amount of of advance you can opt for would be ₹30,000.

However, some cards allow you to borrow up to 50% of the credit limit as an advance. Moreover, the amount you borrow is blocked against your credit limit and is only released when you make repayments. Unlike regular purchases you make via your credit card, the interest on credit card money advances starts accruing immediately from the date of cash withdrawal. Also, the borrower must be mindful of the fact that the money advances on credit cards does not attract the standard interest rate, and usually the interest associated can be substantially higher when compared to standard overdue interest charges. Also, there might be some additional charges applicable with respect to advances in the form of cash from credit cards. If you’re wondering how to get cash from a credit card, and planning to do so, then it is recommended that you read all the terms and conditions regarding charges to ensure any future shocks.

2. Merchant Advances

Banks and financial institutions offer merchant cash advances to small businesses, which are essentially quick short-term loans based on past and projected sales and revenue. Businesses can get access to funds within just a few days by simply submitting an application along with their financial statements.

As the financial institutions or banks (Lenders) may have access to past sales, and they are able to make a good assessment of potential sales, the lenders are able to calculate how much in the form of advances can be lent to the borrower. Once the money is disbursed, the advances are recovered from the future sales in the form of a fixed percentage or a fixed amount, as outlined in the contract.

3. Payday Loans

Payday loans are ultra-short-term loans targeting salaried individuals. The amount of loan you’re eligible for depends on your last drawn salary. Such loans are due for payment on your next payday. However, you may choose to extend the due date further but will be required to pay additional interest. The interest rates and processing fees on payday loans tend to be significantly higher than the other two types of of advances.

Payday loans as a product are usually targeted to serve the purpose to help the borrower get through the month until the next payday in case of a cash shortage. The basic features like repayment tenure, interest rates, processing fees, usual loan size, etc. all indicate a very short term and small ticket size loans towards the middle and lower middle class society.

Also Read: Guide to Credit Bureau, Credit Scores & Credit Reports

How Does Cash/Money Advance Work?

Now that you’ve seen what or money are and their different types, let’s quickly look at how they work.

1. Credit Card Cash Advances

To get a credit card cash advance, all you need to do is visit a nearby ATM and use your credit card to withdraw cash; similar to how you use a debit card. Alternatively, you may also visit your bank to withdraw cash from your credit card. In this case, you may be asked to produce your credit card and fill out a cash withdrawal application.

Once you obtain a an advance, interest starts accruing on it immediately. Credit card issuers typically continue to charge interest daily on the advance until you pay off the entire borrowed amount along with the accrued interest. Additionally, you will also be levied a one-time credit card advance fee for using the facility.

Make note that the advance limits in case of credit card is not separate from your actual credit card limit. Whatever amount of advance you end up taking will be blocked from your credit card limit. In case, you already have a high utilization, and there are no limits left in your credit card, then the advances facility will not be available to you citing the fact that you’ve already exhausted your borrowing limit.

2. Merchant Advances

Small businesses looking to gain access to quick funds can approach financial institutions to obtain merchant advances for cash. They would be required to submit an application along with their financial statements evidencing their past sales and revenue along with projections for the future based on which the funds will be disbursed.

Repayments are often made through a percentage of daily sales until the merchant loans along with interest and other fees are paid in full. Businesses may also choose to make a single bullet repayment as well.

In case of low volumes of sales, the borrower may face an issue of piling up of interest rates, as the lenders will continue to charge the same until the loan is paid off. It is recommended that the borrower keeps enough wiggle room, so that in case of low sales volume because of seasonal fluctuations in demand, increased competition, better alternatives, and other external factors the borrower has enough money to make a bullet payment and bring down the total outstanding amount.

3. Payday Loans

Payday loans are typically offered by online lenders through an entirely digital process. All that you need to do is sign up with an online lender, fill out an online application, attach all the necessary documents (salary slips and KYC documents) and select the amount of business loan you require. Once your request is submitted, you get an instant advance for cash disbursed directly into your bank account.

These payday loans are a type of line of credit offered to retail customers. Based on the borrower’s income and average balances, a fixed amount of loan can be offered to help the borrower sail through till the next payout date.

Features of cash or money Advances

Cash or money advances have certain features and characteristics that set it apart from other traditional financing options. Here’s a quick overview of some of its key features.

1. Fast Disbursals

Money advances provide quick access to funds, making them ideal for emergencies. Depending on the type of money advance you opt for, you can get your hands on funds within 24 hours to a few days. These fast disbursals come as a boon in times of need. Disbursals for products like payday advances are lightning quick and can come really handy to the retail clients.

2. Short Repayment Periods

Cash or money advances generally require you to repay the borrowed amount along with interest within a short timeframe, often ranging from a few weeks to a few months. Shorter repayment periods mean less money spent on interest payment and the liability too is paid off quickly. This also helps free up borrowing limits and increases eligibility for future loans if the borrower makes timely repayment.

3. No Credit Checks

Money advances have no credit score requirements, making them accessible to individuals with poor or no credit scores. Since these are short term and low ticket loans, the credit requirements for these loans aren’t as stringent as their traditional loan counterparts. These loans can be leveraged by individuals with low credit scores or for those who do not want to go through the hassle of long processes to fulfill their short term and low value money requirement with the help of a loan.

4. Benefits of money Advances

Such advances offer a plethora of different benefits to individuals and businesses. Understanding what they are is crucial to making informed financial decisions. Let’s look at some of the key benefits of advances.

5. Minimal Documentation

Unlike traditional loan options, advances only require you to submit minimal documentation. In some cases like card advances, you don’t have to submit any documents at all to avail of the facility. Minimal documentation helps with faster processing and disbursal of loan, which is perfect to cater to short term and urgent requirements from the borrower.

6. Zero Collateral Requirements

In case of credit requirement for a short term and a small amount, pledging your assets or going through the hassle of arranging a collateral may not be the best idea. With money cash advances, you don’t have to pledge any asset as collateral to avail the loan facility, making it ideal for individuals and small businesses with little to no assets.

7. Flexibility

Money Cash advances can be used for a variety of different purposes ranging from bill payments and unexpected expenses to meeting cash flow gaps in business. These advances can prove to be extremely beneficial in times of need. Also, the benefit offered in terms of shorter repayment periods, loans for smaller amounts, and minimal credit checks supports the cause to make it as flexible and accessible to the borrower as possible.

Also Read: Tips to Increase Your Small Business Credit Score

Drawbacks of Cash Advances

Although advances are largely beneficial, they do have their share of drawbacks. Here’s a quick overview of some of its disadvantages.

1. High Borrowing Costs

Advances come with significantly higher interest rates and other associated charges compared to other kinds of loans, making them a highly expensive borrowing option. Although the total interest amount in terms of real money may feel insignificant in case of advances for a shorter duration, however in percentage terms the interest charged is usually on the higher side. This coupled with other charges like processing fees, etc. makes the borrowing comparatively more expensive.

2. Potential Debt Trap

The high borrowing costs combined with a short repayment period may potentially trap you in a cycle of debt if advances are not managed responsibly. It is recommended to borrow responsibly, if it helps you can have a repayment plan chalked out with all the variables into consideration to help manage the repayment efficiently.

3. Impact on Credit Score

Defaulting on the repayment of money advances or paying just the minimum amount due can negatively impact your creditworthiness and make it harder for you to get loans in the future. In case of default or delayed payments, the negative impact on your credit score can have a long standing effect on your credit taking ability, even if you do end up being eligible for future loans, the interest rates would be on the higher side to help lenders compensate for the risk associated with lending you the money. Hence, it is essential to do timely repayments to avoid any negative impact on the credit score.

Is a Cash/Money Advance Right for you?

Determining whether an advance is suitable for you or not depends primarily on individual circumstances and financial needs. For example, if you’re in urgent need of cash and don’t mind the high borrowing costs and fees associated with advances, you may consider opting for it.

On the other hand, if you can afford to wait a few days to get access to funds, it is advisable to consider alternative financing options like the Pradhan Mantri Mudra Yojana, personal loans from banks or loans from friends or family. This way, you can avoid the financial burden associated with advances while still getting the funds you need.

How to Apply for Cash Advance?

The application process may vary depending on the type of advance you opt for. For example, in the case of credit card advances, you can withdraw funds from ATMs or visit a bank branch along with your credit card.

In the case of payday loans, you can avail of the cash/money online by simply filling out and submitting a digital application along with the necessary documents. Merchant advances, meanwhile, require you to complete an application either online or in-person and provide all the necessary documentation including past and projected financial statements of your business.

Eligibility Criteria for Merchant Advance

The eligibility criteria you need to satisfy to avail of a merchant money advance will vary depending on the lending institution you opt for. Usually, lenders look for stable businesses with a steady cash flow, a specific average monthly revenue and strong repayment ability.

In addition to this, financial institutions may also impose other criteria such as the presence of a Point Of Sale (POS) machine, certain annual turnover requirements and creditworthiness.

How Advances for Cash Impacts Credit Score?

Advances don’t impact your credit score directly. However, certain actions like defaulting on repayments and multiple enquiries from different lenders within a short period can hurt your credit score.

In the case of credit card advances, the more you borrow, the more you use up your credit limit. This can lead to a higher credit utilization ratio, which is one of the many factors that lower your credit score.

As long as you make repayments on time, refrain from applying with multiple lenders in quick succession and ensure that your credit utilisation ratio is within the required limits, advances shouldn’t have any negative impact on your credit score.

Conclusion

Advances are a highly convenient financing option that can provide you with quick access to funds to tide over emergencies. However, the associated borrowing costs like interest, processing fees and other charges tend to be more expensive than traditional loans and credit facilities.

Therefore, if you’re planning to opt for this facility, make sure to carefully consider your financial situation, explore alternative options and fully understand the terms and implications of the credit facility before going ahead.

Frequently Asked Questions

1. What are ATM cash/money advances?

Individuals with credit cards can visit a nearby ATM and withdraw cash against their credit limit. Such withdrawals are termed ATM cash/money and are subject to high interest rates and money advance fees.

2. Why are cash/money bad?

These advances are often considered to be a less-than-ideal way to obtain access to funds due to their high borrowing costs, short repayment periods and the potential to trap borrowers in a cycle of debt. Borrowers should always borrow responsibly and use debt towards productive use cases to avoid repayment burden.

3. Is an advance a loan?

Yes, a cash/money advance is a type of short-term loan that provides immediate access to cash, often at a higher cost compared to traditional loans. Even though the application process for a traditional loan may be longer and may demand more documents compared to advances, however as there is lending and borrowing involved between the financial institution and the individual/business, it still qualifies as a loan.

4. What is the difference between loans and advances?

Although loans and advances are terms that are often used interchangeably, they have completely different meanings altogether. Advances refer to short-term credit facilities with high borrowing costs, whereas loans refer to long-term credit arrangements with lower interest rates.

5. Is a money advance a good solution for emergency funding?

Money advances could potentially be a good solution for meeting emergency expenses. However, it is important to understand that they often come with high costs and risks. Therefore, it is advisable to explore alternative financing options before opting for a an advance.