Every business needs commercial finance assistance at some time or another. And getting a Business Cash Advance can be a great move for your business, however it is also essential to be wise about it.
No-one should take a loan without careful consideration, planning and without exercising caution.
A Business Cash Advance is not necessarily the same as a loan, but it is a type of loan. It is a short term loan that is given to businesses when they need to carry out a transaction and do not have the money at hand.
Most banks give cash advances to businesses that have proven themselves over a couple of years. One of the requirements is that you must have been their client, and if they gave you a loan previously, you must have repaid it in time without any defaults.
Credit card companies also issue cash advances, and it is still important for you to understand a few facts before you take one out.
The cost of the cash advance
Remember that this is money that the bank will lend you, and you must repay. Cash advances normally come with a percentage interest figure that you must first find out before taking out the advance. The amount of interest you are being charged should be a factor in your careful consideration of whether to sign on the dotted line.
A cash advance is normally given very quickly; in fact you may apply for it from the bank and receive it within the hour, meaning that it doesn’t take the time that normal loan applications require, and in some instances it is treated like an overdraft facility, where your account is ‘overdrawn’ awaiting funds to be deposited to cancel out the overdrawn status.
What banks do, because they understand that you desperately need the money, is to charge a high amount of interest on the cash advance. For example, you can find that an advance given for 30 days, may attract an interest rate of 20%. This is very high, and you must consider this before accepting the advance.
Another point to consider is that cash advances do not give you a grace period, and you are required to start paying off the interest immediately the advance is taken out.
When doing the calculations, always consider the cost of getting that advance. If it is too high, then, it is probably not worth it, and you should consider other sources of income in order to deal with your most immediate and pressing need for money.
In most cases, a cash advance is normally given a short repayment period between 1 and 6 months. Rarely will you find your company giving the offer for more than 12 months, but, it is possible in cases where you are a very good client.
Now, what you must consider is how much you will end up paying during the repayment period and whether or not you will be able to repay within the said time period.
If your advance is issued and must be paid off within a month, then this can be dangerous to the company if you are not able to raise the funds within the allocated time period. However, the sooner you pay off the advance, the better for you.
Here’s why. An advance that is repaid within a shorter period tends to accrue less interest compared to one that is repaid within a long period such as a year. If you are going to repay the advance within the period of a year, remember that each month you shall be paying interest and by the end of the year, you will have paid a lot of interest.
The disbursement procedure
You must also consider this, because in most cases, the financier will opt to pay for your needs directly to the supplier, rather than issuing you the money in cash format.
You need to consider this too, because if you were expecting cash, you may end up being disappointed.
The reason why a bank or any other financial institution would opt to do this is due to the risk element associated with cash advances.
So, before you take out that cash advance and sign on the dotted line, ensure that you have all the facts, and you understand exactly what you are about to enter into. The biggest drawback of cash advances is the interest rates, otherwise, they are an excellent way of getting money quickly if you are in a fix.