A surprising number of MSME owners (micro, small and medium enterprises) tend to rely on their credit cards when they end up being strapped for working capital cash.

The convenience that credit card cash advances offer may seem attractive at first glance. After all, these allow you to withdraw a substantial chunk of cash on the spot and in a flash. No paperwork, no collateral, and that’s that.

Here’s the problem: from a financing point of view, using cash advances is a serious no-no. Why? Well, first of all you have to pay for the transaction fee, which may be as high as five percent of the loan amount. And since you only have about a month to use your quick loan, that translates to an interest rate of 5 percent a month, for an annual interest rate of roughly 60 percent!

And if you decide to pay in installments, then you will be further subjected to the monthly finance charge, which at 3.5 percent a month (compounded monthly) comes to at least 50 percent per annum.

By contrast, if you get yourself a pretty cozy credit line at a bank, you can get a rate of 10 to 12 percent a year (less if you have a good credit history).

Unfortunately, many SME owners are averse to dealing with banks because of the paperwork and requirements involved. But that’s where revolving credit becomes useful — do the paperwork just once and you will eventually have quick access to cash when needed. And if it means saving over 40 percent in interest payments on your loan, then wouldn’t that be worth the hassle of the paperwork?

So avoid using your credit cards for cash loans. It just doesn’t make good business sense.