Personal Loan vs. Cash Advance: Which Is Better For Business? 

6 months ago
5 mins 6 secs

Global economies have continued to face mixed macro key issues this last quarter of 2023. These include subdued global trade, slow growth, and a strong US dollar.

On top of all, demand and inflation remained unexpectedly more persistent than projected. As a result, they not only further increase rates but also cause a harder landing for the global economy.

These financial crises have caused financial institutions to implement tighter monetary policy.

Many businesses, especially the small and new ones, struggle to avoid the knock-on effects. Thankfully, with the widespread digital transformation, they can now easily rely on alternative financing. 

In this article, we’ll focus on personal loans and cash advance loans. We’ll compare the two and determine the best option to fund a business. 

Cash Advance

If you’re seeking a loan that can be repaid within a short time frame without undergoing the rigorous application process of traditional loans, a cash advance loan is your optimal choice.

This type of loan comes in various forms, such as credit card cash advances and payday loans.

A cash advance is a quick and easy loan, typically short-term and unsecured, often with minimal requirements.

If there are, they’re not that hard to meet and comply with. That’s why its approval and fund disbursal is fast. 

Take a $500 cash advance with no credit check, for example. As its name implies, it doesn’t require any credit check, so borrowers with less-than-stellar credit scores often take it out.

It can be taken in many ways, such as through payday loans, title loans, pawn shop loans, personal installment loans, and bad credit loans. 

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As mentioned, no-credit-check loans are typically available from alternative lenders, such as online lenders.

They can also sometimes be taken at smaller community banks and credit unions, which are safer options since they have capped interest rates. 

However, in exchange for their convenience, no-credit-check loans come with higher costs.

They’re usually in the form of interest rates, higher fees, or onerous terms, making repaying the loan more difficult. It’s highly recommended to take this option with caution. 

Take payday loans as an example. In this borrowing option, you often end up paying $10 to $30 for every $100 you borrow. These fees get added to the loan amount on the day you borrow the money.

For example, let’s say you’ll be charged a $15 finance fee per $100 borrowed on $400. That would cost you $460, which you have to pay on your payday, often within two weeks.

If these charges are calculated as an annual APR, this loan is charging you over 390% in interest. 

Still, a short and quick cash advance is of great help, especially if you have an unexpected cash emergency in your business but still have bad credit and poor business history.

Most traditional lenders, in contrast, hesitate to lend to new and small businesses for many reasons, such as poor credit rating and lack of business history, to name a few.

Another example is a credit card cash advance, where you borrow against your credit card account.

It also doesn’t require a credit check or any requirement, so you can easily withdraw funds at an ATM or visit your bank for a withdrawal without any loan application.

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What’s more, although it’s a borrowing option, it’s considered a standard credit card transaction. 

However, it still has high-interest rates, which are higher than those of regular credit card purchases.

Even worse, its interest can accrue immediately, making it a potentially risky option. It could lead to a debt spiral, so it needs careful consideration before taking it out. 

Personal Loans

If you need a versatile borrowing option that can be utilized for various purposes, a personal loan is a favorable choice.

It can be used for medical emergencies, funerals, home renovations, car repairs, weddings, vacations, and even businesses. 

Similar to a cash advance, it’s typically unsecured, providing a fast application and approval process and nearly instantaneous fund disbursement.

Many personal loan lenders even advertise instant approval and funding within a matter of seconds.

What sets a personal loan apart from a cash advance is its benefits. It often comes with a more extended repayment period, offering flexibility for individuals who may face challenges in meeting repayment obligations.

Additionally, a personal loan boasts lower interest rates compared to a cash advance.

With interest ranging from 6.99% to about 35.99%, it starkly contrasts some cash advances, especially payday loans, which can reach exorbitant rates as high as 664%.

The key factor contributing to these lower interest rates is the inclusion of credit checks in the application process.

Personal loan lenders typically require a credit score, which plays a crucial role in determining the interest rate.

Generally, a credit score of at least 610-640 is necessary to qualify for a personal loan. In particular, a score of 690 or higher is recommended to secure a very low-interest rate. 

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Which Is Better For Business?

The “better” option greatly varies on a business’s needs. Cash advances offer a quicker option with less paperwork and accessibility for businesses with lower credit scores. However, they often come at a higher cost. 

Be mindful of the high interest and fees associated with cash advances. Evaluate your financial capacity to ensure you can comfortably pay it off promptly, considering these additional costs alongside your other expenses.

On the other hand, personal loans may take more time and require better credit, but they’re generally more cost-effective. Not only do they have lower interest rates, but also higher borrowing limits. 

Depending on your creditworthiness, personal loan lenders typically offer borrowing amounts ranging from $1,000 to $100,000 or more. In contrast, cash advances are usually capped at around $50,000.

Final Thoughts

Cash advance loans and personal loans are two of the most sought-after alternative financing nowadays for personal funds and business capital.

Before choosing between the two, research and carefully consider factors like urgency, repayment ability, credit score, and the amount needed.

If you’re unsure, seeking professional advice and personalized guidance based on your business’s specific situation is always recommended.

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