What is the difference between a payday loan and a cash advance?
Feb 16, 2016
It happens to everybody. Your car won’t start, and rent is due next week. A pipe burst and your store is flooding. Maybe the computer that you run your business on broke and it needs repairing.
Or maybe opportunity is knocking. Maybe you’re one marketing campaign away from doubling your monthly revenue. Maybe a second truck will help you reach new customers.
Everybody is susceptible to the type of misfortune or opportunity that necessitates having extra cash on hand. Those circumstances don’t change if your credit is less than perfect or your business account is a little short on funds.
Now, while having less than perfect credit and a checking account that doesn’t enable you to remedy the misfortune or seize the opportunity is far from ideal, don’t worry, you still have options. Namely, cash advances or payday loans might be the way to go.
Cash advances and payday loans are two of the most popular short-term lending options available to consumers. They allow the borrower to get the money they need in minimal time under less than ideal conditions. Don’t have time to wait for the bank? Can’t get approval because of a low credit score? Cash advances and payday loans provide fast alternatives.
That said, utilizing a cash advance or a payday loan are big financial decisions that warrant adequate thought and research. Knowing the specifics of each is crucial to properly utilizing them while incurring as few additional charges as possible.
Understanding the difference between a cash advance and a payday loan is key in figuring out how to approach your situation. Both come with their own requirements, processes, and risks. Identifying these differences will help provide more clarity when weighing both options. Following are a few ways that cash advances and payday loans differ.
Purpose for taking out the loan
More often than not, why you need the loan in the first place will be enough to determine which financing option is right for you.
If the reason for your taking out a loan is business related, you should strongly consider going with a merchant or business cash advance to provide you with the funding that you need. There are plenty of companies, like Legend Funding, that are willing to work with less than ideal credit to get you capital as quickly as possible. Expanding or repairing office space, increasing the reach of your company, marketing campaigns, and hiring staff are all reasons to use a merchant or business cash advance.
Payday loans are meant to be utilized for more personal matters. A blown tire or a personal computer malfunction that needs immediate repairing are perfect examples of legitimate reasons to utilize the fast cash provided by a payday loan.
Requirements for receiving the loan
While the attractiveness of a cash advance or a payday loan lies partly in its lax requirements, the borrower must still meet a few basic standards to receive their quick cash.
As a small business owner, the types of cash advances you can receive vary and are based primarily on how you receive your payments from customers. A merchant cash advance is tailored towards those whose transactions are done primarily using credit and debit cards, while the business cash advance deals more with people who collect payment via check. The specific requirements depend on who you’re borrowing from, but they include bank statements going back a set number of months (usually 3 to 6), your credit score, and access to your bank account.
Payday loans, along with personal identification and some proof of income and employment, require a post-dated check for the balance of the loan plus the lender’s fee. The idea here is that the borrower repays his/her loan the next time they get paid, usually on whichever day the check was dated. Whether or not the lender deposits the check or the borrower returns to pay in person depends on the specific agreement.
Restrictions on amount of money borrowed
How much money you need in a given situation is an obvious determinant in which lending option is right for you and, more specifically, which provider you should do business with.
The amount of money you can borrow at one time using a cash advance depends on the revenue that your company brings in monthly. The sustained success of your business takes precedence over your credit score- you may be able to receive 50% to 80% of whatever your monthly revenue is in an upfront lump payment.
Payday loans face much stricter legislative restrictions than do credit cash advances, as some states have outlawed the unrestricted loans entirely. Traditionally, based on state restrictions, these loans range from $100-$1000 dollars. How much of that money a borrower can actually get depends on the lender. Some only need to see a checking account that is in good standing and some proof of employment. Other lenders might look into your fiscal history to see if you were responsible with your repaying loans in the past.
Repaying the loan
Nobody likes losing money that they don’t have to, right? Paying back your loans on time is the easiest way to minimize the costs of utilizing quick cash.
How you pay back a cash advance is specific to the provider you borrow from, but most implement a similar structure. A merchant cash advance involves the borrower selling a percentage of future credit/debit card sales to the lender for a lump-sum payment. The easiest way to go about splitting sales between the business and the lender is for the credit card processing company to split the sales themselves. So, if a small business sells an item for $500 and the lender was guaranteed 10% of all sales, the processing company would give $450 to the business and $50 to the lender. A business cash advance, on the other hand, has the lender withdrawing a set amount from the bank account linked to the business. The frequency of these withdrawals, whether daily or weekly, depends on the lender.
The idea behind a payday loan is that the borrower will be able to pay the lender the money that they owe on their next pay day, hence the expected two weeks between borrowing from the lender and paying the lender back. The borrower usually writes a predated check with the amount that they owe plus the fee (usually between $15 and $30 for every $100 borrowed) to be deposited on a set date. When that date comes the lender deposits the check and, as long as it doesn’t bounce, the debt is paid off. For a fee and the accruing of additional interest the borrower can roll the loan over for another two weeks, though this method isn’t advisable.
Additional fees and interest
Awareness in regards to the actual money that you’ll need to pay back is crucial in not allowing these short-term loans to affect your long-term financial success.
Neither a merchant nor business cash advance is a loan, so it isn’t subject to traditional interest rates. Instead, for a merchant cash advance, the borrower agrees to pay back the money borrowed plus a certain percentage of that using a percentage of their sales. The interest does not increase based on repayment time. Rather, it is a fixed rate determined up front. This repayment system is ideal for merchants looking to avoid surprises or unexpected increases.
Payday loans typically operate within the every two week repayment system, rather than a percentage at POS. The traditional rate for a payday loan is somewhere between $15 and $30 for every $100 borrowed. After factoring in the traditional 400% APR over a two week period, an individual borrowing $500 stands to pay somewhere between $100 and $200 in addition to the original $500 borrowed.
Deciding to take advantage of either of these short-term lending options is a big decision that shouldn’t be taken lightly. Make sure you know the specifics of your situation and have a plan in place that, while taking interest and additional fees in to account, allows you to repay the lender in a timely and structured manner.