The Lowdown on Cash Advance Interest, APR and TCC | Behalf
The Lowdown on Cash Advance Interest, APR and TCC
If you own a small business, the term cash advance interest may or may not ring a bell. Nevertheless, even healthy small businesses experience the occasional cash flow gap and receive external funding to boost their capital reserves. Many business owners fall victim to predatory lenders because they do not fully understand the financial jargon in their lender’s terms. They mistake concepts like cash advance interest with total cost of credit (TCC) or annual percentage rate (APR). Lenders don’t make it any easier when they fail to give straight answers about their cash advance options. It is time we stop blurring the lines and tell small business owners just how cash advance interest, APR and TCC factor into their borrowing experience.
What is Cash Advance Interest, APR and TCC?
For the record, cash advance interest is the base amount you are charged for borrowing. The rate is either a variable or a fixed percentage of the cash advance. Cash advance interest is only a part of what you will eventually owe your cash advance lender on the amount you borrow.
In contrast, APR and TCC are more comprehensive measures of what you owe on top of your cash advance, including cash advance interest; service fees; hidden fees; closing costs; etc. Though APR and TCC are similar, there is a major difference: time. APR takes the time value of money into account, while TCC does not. In other words, APR accounts for the cost of the cash advance and the length of time the borrower has to use it, while TCC only shows the static cost of the cash advance. To illustrate, the TCC may be smaller for an advance, while the APR is higher because you have less time to use it. If you make your decision based on APR, you can actually end up paying significantly more in absolute dollars. However, if you intend to borrow for a long period time – even permanently maintain a loan by paying just the minimum due each month – choosing the lowest APR would be the best option for you.
Cash advance interest also takes time into account but it uses smaller increments than APR. Cash advance interest is a monthly calculation, rather than an annual one. Cash advance interest rates give you an idea of your monthly cost of borrowing, while APRs give you the annual big picture. Nevertheless, both items tend to be proportional to each other in size. Why? The cash advance interest rate is the largest component of the cash advance APR. That being said, APR gives you the fullest long term picture than either TCC or cash advance interest.
So Why Should You Still Pay Attention to Cash Advance Interest and TCC?
Predatory cash advance lenders blindside small business owners by emphasizing only the APR, because it keeps borrowers partially in the dark about their expenses. Many think that the APR is a simpler, more effective measurement for comparison because it covers all of your bases. You would do yourself and your business a disservice if APR was all you took into account when shopping for a cash advance. APR is not a good tool for comparison because APR is not a standardized measurement. Cash advance APR varies based on whichever fees and factors the lender decides to include. While a lower APR may sound good and make a lender more marketable, they could just be excluding some of their fees in the APR calculation. Therefore, a lower APR is not always the better option. You want to know just what a cash advance lender’s APR includes because a predatory lender may overcharge, sneak in pointless fees or omit costs.
It is best to examine a cash advance from the bottom up, as opposed to the top down. Look beyond the APR, dig for specific fees, the TCC, and the cash advance interest rate; the whole will not necessarily be greater than the sum of its parts.