If you run a small company you will need money for a large variety of things. This will range from long term planned expenses, like business expansion, retooling, etc. to the need for emergency funding. It is always a good idea to have extra cash on hand, or available credit to deal with emergencies, but if you don’t have cash available an advance may be a good idea. Today we will talk about three things you should take into consideration if you are considering getting a small business cash advance.
First we should define what a small business cash advance is in general. These advances are a way to get quick cash for small businesses; typically a small business is defined as under $100k a year in revenue. It is understood that you need immediate funds, and don’t have a lot of extensive business history or credit necessarily. These are quick to obtain, require repayment in a short amount of time, and are much more expensive than long term loans in general.
So when should I get an advance if they are so expensive? You need to weigh the impact of the emergency situation to the interest rate cost of the loan. Sometimes rates can be in the high double digits, but chances are you’ll be paying it back in a short amount of time. So, if you can’t justify the expense you shouldn’t borrow in this way. There is a bad trend in personal and business borrowing to obtain funds at too high a price rather than putting in the legwork to get a good loan, or obtain funding through other means.
What companies offer this service? Traditional lenders don’t give out these high interest loans, at least not directly. Many of the small companies you deal with are actually just wholly owned subsidiaries of major banks. But at any rate, you should always investigate any company you are planning to work with before sending them your personal information, the better business bureau is a great place to start for this.
Finally, we should discuss rates and fees. Many companies will charge an upfront fee for the service in lieu of a standard interest rate. You should calculate this amount and see what the comparable amount of interest is. For example, if you pay $1.50 for every $20 borrowed, that is equal to an annual interest rate of 84%. Obviously you would only borrow at that rate in emergencies.