Cash advance or standard business loan?

If you’re looking to get your SME off the ground, then you might be deliberating the various sorts of finance available.

Cash advances, of the sort provided by Nucleus, represent an alternative to the traditional sort of loan. But what exactly are the differences between the a cash advance and a standard business loan, and what reason is there to prefer one over the other?

What’s a loan?

A loan is an amount of money that you’ll be lent to do something specific with. Often, a loan is secured using something you own (collateral). That way, if you fail to pay back the loan, the lender will be able to sell your stuff to get their money back. So, you might use a mortgage to buy your premises, thereby avoiding the up-front cost of the property.

What’s a cash advance?

A cash advance doesn’t need a specific purpose, and avoids much of the bureaucracy and delay involved with getting a traditional loan. When you spend money using a credit card, you’re using a credit card.

What are the advantages of a loan?

Loans tend to work out cheaper in the long-term than cash advances. There’s a lower APR to worry about, and you won’t have to contend with the fees associated with requesting a cash advance. Moreover, cash advances tend to have credit limits in place to prevent you from taking out more than a few hundred pounds at a time.

What are the advantages of a cash advance?

When you take out a loan, you’ll agree to pay the money back at regular intervals. With a cash advance, you can pay back the money whenever you like (though you will accumulate interest for as long as you’re indebted).

Business credit cards may seem like an emergency measure that should only be needed if the right planning steps have been neglected. But the fact is that unpredictable situations arise all the time in business, and a cash flow problem can be crippling in the short-term. If you can’t pay your staff or your suppliers, then you may incur reputational and other non-monetary costs which far outweigh the interest on a cash-advance.

Comparing the costs of the two forms of finance directly can be difficult to calculate. Often, some of the costs of a cash advance are hidden, and small businesses find themselves unwittingly saddled with crippling debt. As such, it’s worth acquainting yourself with the options before you actually need the cash urgently. That way, you’ll be able to avoid rushing into a costly error.