Merchant cash advance or line of credit: which should I use?

For a short, repeated cash gap, a line of credit is usually the cheaper tool: you draw what you need, pay interest only on what's drawn, and the limit is there again once you repay. A merchant cash advance is a single lump sum with a fixed cost, repaid from sales, and it is generally easier and faster to get, but far more expensive per year.

How each one works

The worked number

You need $50,000 to cover a stock purchase that sells through in about a month.

Cash advance. $50,000 at a 1.35 factor over 6 months, paid daily, is $67,500 back. The cost is $17,500 whether you needed the money for one month or six. That's about 126% APR.

Line of credit. Say the line charges 18% APR. Drawing $50,000 for one month costs roughly $750 in interest ($50,000 × 18% ÷ 12), plus any draw fee. Repay when the stock sells and the cost stops.

That gap, $17,500 against roughly $750, is the whole argument. The advance only wins if the line isn't available to you, isn't big enough, or can't be opened in time.

Sterling's take: a line is what you set up before you need it. An advance is what you take when you didn't.

When a line of credit fits

• Seasonal or lumpy gaps you'll hit more than once a year
• You can repay each draw within weeks or a few months
• You have the credit and time trading a line provider asks for
• You want something in place for the next surprise

When a cash advance fits

• Your credit or history won't support a line yet
• You need a lump sum for one specific purpose with a clear payback
• Your sales are card-heavy and seasonal, and a true percentage holdback suits the shape of your cash flow
• You've done the APR maths and the return on the money still clears the cost

What to watch on each

On a line: draw fees, annual or maintenance fees, whether the rate is variable, and whether the provider can reduce or freeze the limit.

On an advance: fees deducted from the advance, whether payments are a true percentage or a fixed debit, the reconciliation clause, personal guarantee terms and any confession of judgment.

What to do next

If you have time, apply for a business line of credit while the business is doing well, so it is there for the next gap. If you're holding an advance offer now, convert it with the MCA APR calculator and compare it with the interest a line would charge over the time you actually need the money.