A cash advance is a business financing tactic that allows a small business to obtain operating capital without taking out a loan. It’s a short-term solution to cash flow challenges and not meant to commit the business to a long-term financial arrangement. Most cash advances are for three months up to a year.
The basis of a cash advance is a business’s receivables. If you have, let’s say, $10,000 expected receipts, unpaid customer invoices, in a given month, those are your receivables. Businesses that operate on net terms (Net 30, Net 60, or Net 90) can often find themselves in a negative cash flow situation even when their business is making money. After all, you still have other operating expenses that you need to cover even when your customers’ receipts have not come due.
These receivables are often in the form of credit, or credit cards, but not always. In some cases, you may have unpaid invoices where you are expecting a check or electronic transfer. But, traditionally, unpaid credit is the reason companies seek out cash advances.
When to Consider a Cash Advance for Your Business
In some situations, a business might be better off seeking a loan. For instance, if you are buying real estate because you want to expand and grow your business by adding a new location, you’d be better off funding that purchase with a loan or cash reserves. The reason is because real estate purchases are typically large expenses and may carry notes for more than a few years whereas a cash advance is a short-term financing mechanism that has a shelf life of a few months.
Cash advances can be a good idea under certain business conditions. Here are three scenarios where you might want a cash advance:
- To purchase new equipment – If you are in a situation where you need to purchase new equipment for your business because your current equipment is too old and requires maintenance too often, and you have uncollected receivables with some cash reserves, a cash advance could get you through your short-term cash flow challenge and moving back in the right direction. Some businesses will have to close their doors if they don’t get the new equipment. The fact that you have receivables, which is income not yet realized, and some cash reserves means you have the money to purchase the equipment but using your cash reserves could put you in a bind with other creditors. A cash advance could save your business.
- To hire more staff – Your business is growing and you want to hire more staff to cover the demand caused by this growth. If you cannot afford to pay those employees right now, you may take out a cash advance and use it to make payroll as you collect payments from new customers.
- To pay bills – You have bills that are due and more than enough receivables to cover it, but those receivables won’t come in the door until too late. Paying late fees and interest could kill your profits. A cash advance, however, could protect them.
This is just three scenarios. A cash advance is not for every business, but it can be a life saver for some businesses.