You have probably heard mention of a small business cash advance throughout the normal operation of your business, but what are they and how do they work? We will attempt to answer that question in today’s article.
Purpose: The purpose of a small business cash advance is to help your small business get the money it needs as quickly as possible. They are designed specifically for emergencies where funding must be obtained within 7 days or less. Some examples of this would be mission critical equipment repair, payroll shortages (to some extent) and other such emergencies. They accomplish this goal by streamlining the approval process as much as possible and have a very fast cash disbursement process, usually directly deposited into your company’s checking account.
Scope: The scope of these loans is very small. Typically you can only borrow up to one month’s revenue (based on the last 6 months) and you will need to pay back the loan very quickly typically within 90 days or less. So to that end they are not good for any type of large scale or long term purpose. These are basically loans to deal with a lack of cash on hands, perhaps you are waiting for customers to pay you for services already provided for example.
Cost: This is definitely where advances fall short, and should be used sparingly for this reason. Although getting approved is really fast and easy, the downside is definitely cost. The upfront fee (usually charged in lieu of interest) can be anywhere from 4 to 15%. This may not sound like much, but considering you have to repay the loan in full in 90 days or less, this translates to the mid to high double digit annual interest.
Alternatives: So given that these are very fast and easy to get, but cost a lot, what are some alternatives? Your best alternative is proper prior planning. If you establish available credit in the event of some future emergency you will have funds on hand to deal with it. Not only is this cheaper, but within the time frame of the actual emergency when the money is needed it is actually faster too.
So what have we learned about a small business cash advance? They are easy to get, and also very fast. They are also very expensive, and you can’t borrow more than a small amount. In the end having your own emergency fund/credit is probably your best bet.