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Can a Cash Advance Hurt My Credit Score?

Life happens, and sometimes you need emergency funding to tackle obstacles that may fall on your plate. The best option is to have money saved up for these rainy days, but that isn’t always possible. A situation where a machine that’s imperative to your business needs to be repaired or replaced can set you back hundreds, if not thousands, of dollars. 

If your back is against the wall and you need emergency money fast, a merchant cash advance might be an option to look into. However, there are some important conditions to consider before opting for one.

What Is a Merchant Cash Advance?

A merchant cash advance can be secured from a financial institution where you have an open credit line. 

You can receive it by going into a branch in-person and requesting the money, or by using your PIN at an ATM and withdrawing cash. The problem with using an ATM is that they usually limit the amount of money that you can withdraw at a time or per day. If you need more than a couple of hundred dollars, it’s best to do it in-person. You might also have not received a PIN, in which case you would need to call to request one, which could take up to a few business days to receive.

Some credit cards also provide convenience checks, which work similarly to regular checks. Simply fill out the information and deposit it into your bank account. You can access more money this way than at an ATM.

The Costs of a Merchant Cash Advance

You’re already paying interest and fees towards your current balance with your credit card and you shouldn’t expect anything less with a merchant cash advance. In fact, most merchant cash advances charge interest rates and fees that are much more expensive than your regular credit card costs.

Additionally, interest fees typically start accruing immediately, omitting the typical one month grace period for debt. Also, not only are you charged a fee from your credit card for taking out a merchant cash advance, but you might also be charged a fee through your bank for processing the money into your account. 

If you take out a merchant cash advance on a credit card that has a high balance, some credit issuers will put your payments towards the lower-interest debt, instead of the high-interest cash advance, increasing the amount of money that you pay over time. 

Taking out a merchant cash advance can also negatively impact your credit score, especially if it pushes your credit utilization ratio above 30%. This refers to the balance of how much credit you have available versus how much you’ve already used. Tipping this ratio above 30% makes you appear more risky to lenders.

Alternatives to Merchant Cash Advances

Before considering a merchant cash advance, try to exhaust your other options, such as borrowing from friends and family, lending circles that provide low-interest loans, or debt consolidation loans.

You can also consider short-term loans from online lenders. This is similar to payday loans, which can also be an alternative. Both of these loans require fast payback and can come with steep fees, so this should be considered as well.

While loans can help you in times of trouble, merchant cash advances should only be considered as a final resource and only if you are able to pay it back quickly to avoid becoming overwhelmed in an avalanche of debt.