What is a cash advance fee on a business credit card?

A cash advance fee is the charge your credit card provider applies whenever you use a business credit card to withdraw cash, rather than to pay for goods or services, and it lands on top of interest that starts building straight away. This guide covers exactly how that fee is calculated, what counts as a cash advance in the first place, and how to avoid paying it when there's a cheaper way to get the cash your business needs.

How does a cash advance fee work on a business credit card?

A cash advance fee is charged as a one off cost at the point you withdraw cash, calculated as a percentage of the amount taken out or a flat minimum, whichever is greater. So withdrawing a small amount still costs at least the minimum charge, even though a percentage of that amount would come to less.

Unlike a purchase on the same card, a cash advance also generally loses the interest free period. A normal purchase gives you until your statement due date to pay it off without interest. For many credit card providers, a cash advance starts accruing interest immediately, at a rate that's usually higher than the card's standard purchase APR, and that interest keeps building even if you clear the balance in full at the end of the month.

Which transactions trigger a cash advance fee?

Not every use of a business credit card counts as a cash advance. The table below sets out the transaction types that typically get treated as one.

Providers do vary, so it's worth checking your card's terms if you're not sure whether a particular transaction will be treated as a cash advance before you use it that way.

How much does a cash advance fee cost?

A cash advance fee is usually the higher of a percentage of the amount withdrawn and a flat minimum charge, and both figures vary between providers, so smaller withdrawals are proportionally more expensive whatever your card's actual rate is. The table below is a worked example using a common fee structure of 3% or £3, whichever is higher, to show how that plays out at different withdrawal amounts. Your own card's fee could be set lower or higher than this, so check your terms for the exact figures.

That fee is only part of the cost. Usually, interest then accrues daily on the withdrawn amount from the date of the transaction, at a rate typically higher than the card's purchase APR and set independently by each provider, right up until you clear the balance.

Cash advance fee and interest charges: what's the difference?

The cash advance fee and the interest charge are two separate costs that both apply to the same withdrawal, rather than one being an alternative to the other. The fee is a one off charge taken at the point you withdraw the cash. The interest is an ongoing daily charge that keeps adding to what you owe until the balance is repaid in full. This is why a cash advance can end up costing far more than the headline fee suggests, especially if the balance isn't cleared quickly. Using the example figures above, a £500 withdrawal might cost £15 upfront in fees, but if it takes a couple of months to repay, the interest on top can easily exceed that, and the actual amounts will depend on your own card's fee and interest rate.

Is a cash advance fee the same thing as a merchant cash advance?

A cash advance fee and a merchant cash advance are two different things that share similar sounding names, despite working nothing alike. A cash advance fee is a charge on a business credit card for withdrawing cash, priced as a percentage plus ongoing interest. A merchant cash advance is a separate type of business funding, where a lender gives your business a lump sum in exchange for a fixed share of your future card sales, priced using a factor rate rather than a fee and interest rate. If you're looking into funding your business against its future revenue rather than a card cash withdrawal, our guide to merchant cash advance funding covers how that product is priced and who it suits.

Does a cash advance fee affect your business credit score?

A cash advance itself doesn't directly damage your business credit score, but the way it changes your card's balance and usage pattern can. Cash advances are recorded as a separate, higher risk type of transaction, and taking one out can push up your card's utilisation, the proportion of your available credit you're using, which credit reference agencies may pick up on depending on how your provider reports to them. Relying on cash advances regularly, or carrying the balance for a long time because of the extra interest, is more likely to affect your score than a single, quickly repaid withdrawal.

How can you avoid a cash advance fee?

• Use a business debit card for cash withdrawals instead, since debit card withdrawals don't attract a cash advance fee or lose an interest free period

• Pay suppliers by bank transfer or card payment where possible, rather than withdrawing cash to pay them directly

• Keep a small float of business cash on hand for genuinely unavoidable cash costs, so you're not withdrawing on the card at short notice

• Check your card's terms before any transaction you're unsure about, since some providers treat certain transfers or foreign currency purchases as cash advances even when they don't feel like a cash withdrawal

If you find yourself needing cash advances often, that's usually a sign your business needs a different type of funding altogether, rather than a card feature designed for occasional emergencies.

What are the alternatives to a business credit card cash advance?

If you regularly need access to cash beyond what your card allows without the fee and interest that comes with a cash advance, a few other types of business funding are worth comparing:

• Business overdraft, for short term access to extra funds tied to your business bank account

• Revolving credit facility, for a flexible pot of funds you can draw down and repay repeatedly as your cash flow needs change

• Working capital loan, for a lump sum to cover cash flow gaps with a fixed, predictable repayment

Our article on the pros and cons of a business overdraft covers cost and eligibility in more depth if that route looks like a better fit than relying on your card.

Choose a business credit card built for how you spend

The best way to avoid a costly cash advance fee is to pick a card, and a spending habit, that doesn't rely on withdrawing cash in the first place. With Capitalise, you can compare business credit cards and other types of finance from our panel of 130+ lenders. Just click 'apply' to get started.