What You Need to Know about Cash Advances from a Small Business Credit Card

There are two reasons why you may consider using your small business credit card at an ATM to access cash. The first reason is that you might need some cash while you travel. For example, you may need to take care of expenses that can’t be easily paid for with your credit card, such as gratuities at airports when checking your baggage at curbside or to pay for taxis or public transportation in some cities. And if you’re traveling overseas in a country where many merchants don’t accept credit cards, then you may want to visit an ATM to receive local currency for a wide variety of travel purchases.

The other reason why you may want to use your small business credit card to access cash is to receive a loan to make business purchases that cannot be made with a credit card. For example, many commercial suppliers, vendors, and contractors do not take credit cards, and a company may need access to a cash loan in order to meet its business needs. One option is to use your small business credit card at an ATM to receive a cash advance.

Although it may seem exactly the same, using your small business credit card to make a cash advance is a very different transaction than using a debit card to make an ATM withdrawal. When you use a debit card at an ATM, you are withdrawing funds that you already have on deposit. And since you aren’t taking a loan, there will never be any interest charges imposed on your transaction. At worst, you could see some nominal fees from the ATM operator, and possibly from the issuer of your debit card as well.

In contrast, you’ll always face interest charges when you use your small business credit card for a cash advance, and you’ll likely pay a myriad of fees. First, you’ll always incur interest on a cash advance from your small business credit card, because it’s a loan. And unlike other charges to your small business credit card, you can’t avoid interest on a cash advance by paying your balance in full. Instead, your small business credit card will impose interest charges each day on your cash advance, starting on the date of the transaction and concluding when the entire amount has been paid off.

Furthermore, nearly all small business credit cards will have a higher interest rate, or APR, for cash advances than they will for purchases or balance transfers. So while highly qualified small business owners could receive a standard interest rate for purchases of as low as about 15%, a typical small business credit card will have a cash advance interest rate in the high 20s.

But the higher interest rate is just one of many costs that you can expect when you use your small business credit card to make a cash advance. Your small business credit card will also impose a cash advance fee, which can be very expensive. For example, some small business credit cards have a cash advance fee of $15 or 5% of the amount of each transaction, whichever is greater.  You can also face a few dollars in transaction fees from the ATM operator.

Finally, many small business credit cards have a foreign transaction fee of 3% of the amount of each transaction. These fees are imposed on all transactions process outside of the United States, including ATM cash advances.

While it can be confusing to contemplate the cost of all of these different cash advance fees that your small business credit card can impose, it might help to see some examples.

EXAMPLE #1: NEEDING SOME QUICK CASH DURING AN OVERSEAS TRIP

Imagine you’re taking a business trip to another country, and you realize that you’ll need some local currency to get around and pay for small expenses. You visit an ATM and use your small business credit card to get a cash advance of $100 US Dollars worth of local currency.

First, you are charged a $15 cash advance fee, as well as a 3% foreign transaction fee of $3. In addition, the ATM operator charges you another $3 fee, for a total of $21. Next, your small business credit card issuer is charging you a cash advance APR of 27.24%. By the time you receive your statement and make a payment, 30 days have passed, and you’ve incurred about $2.30 in interest. In the end, you’ve paid $23.20 in interest and fees to access $100 in cash for one month. Effectively, that’s like paying an interest rate of over 250% APR.

EXAMPLE #2: USING YOUR SMALL BUSINESS CREDIT CARD TO FINANCE A CASH PURCHASE

Let’s say that your company needs to purchase supplies to fulfill an order, and the vendor won’t accept credit cards. You use your small business credit card to receive a cash advance of $1,000, and it takes you 60 days to complete the order and get paid by the customer. In this case, the relative cost of the $15 cash advance fee and the $3 ATM fee is much lower, but the interest charges are much higher.

You’ll incur $18 in cash advance and ATM fees, as well as $46.43 in interest over two months. The total cost will be $64.43, which equates to the cost of a loan with over a 75% interest rate. Needless to say, this isn’t a very competitive financing product.

Whether you need to access local currency during an overseas trip, or you just need a few dollars when traveling within the United States, there are much better options than a cash advance from your small business credit card. For example, you can simply use your debit card associated with your checking or savings account, which will never have interest charges. At worst, you’ll pay some ATM charges and possibly a small foreign transaction fee.

Another option when traveling is to just exchange your US Dollars for local currency. Even a 5% commission on the exchange could be much less costly than a cash advance from your small business credit card.

But if you need capital to finance a cash purchase, then you should look into a small business loan or line of credit. Even the least competitive rates for small business loans should be better than a cash advance from your small business credit card.

Another option is to ask the vendor if it will accept payment via PayPal or another electronic payment system that accepts credit card payments. So long as you’re willing to cover any fees the vendor may incur, usually about 3%, then most suppliers will find electronic payments to be acceptable. Even if you pay an additional 3%, and incur interest at the standard rate for purchases, you’ll still save a significant amount of money. In addition, most ATM machines and small business credit card issuers will have daily limits of $500, so you’ll have difficulty making a larger cash advance anyways.

While you can use your small business credit card to make a cash advance, it’s a very costly option. By understanding all of the interest and fees that can be imposed on a small business credit card cash advance, and what the alternatives are, you can make the right decision for your business needs.