Quick overview

Revolving merchant facilities (sometimes called merchant lines of credit or revolving merchant lines) and short-term loans are two common ways small businesses access working capital quickly. Both can solve immediate cash needs, but they work differently and carry distinct costs, eligibility rules, and cash-flow implications. Below I explain the operational mechanics, when each makes sense, common traps to avoid, and step-by-step guidance for choosing the right product for your business.

In my practice advising small businesses for more than a decade, I’ve seen owners use revolving facilities to smooth seasonal swings and short-term loans to seize time-sensitive opportunities. Both can be useful — but only if you match the product to the need.

How each product works

  • Revolving merchant facility: Think of this as a business credit card tied to your card-processing history and daily/weekly card receipts. A lender sets a maximum credit limit based on your average card sales, and you can draw, repay, and re-draw up to that limit. Repayments are typically taken as a fixed percentage of daily card receipts (remittance) or as scheduled ACH payments. You pay interest or fees only on the amount you use.

  • Short-term loan: The lender disburses a fixed lump sum with a set repayment schedule and a maturity date — typically 3 to 18 months. Payments are usually fixed-dollar installments or daily/weekly fixed remittances depending on the lender. Interest and fees are agreed up front and do not change with borrowing behavior.

For reference on business borrowing basics, see the SBA’s overview of small business lending (SBA) and the IRS small-business resources for tax treatment of interest and fees (SBA funding programs, IRS small business guide).

Key differences at a glance

  • Purpose and flexibility: Revolving facilities are best for ongoing working capital needs (inventory, payroll, seasonal purchases). Short-term loans are better for single, time-limited projects (equipment purchase, one-off marketing campaign).

  • Draw mechanics: Revolving = multiple draws up to a limit. Short-term = one lump sum.

  • Repayment structure: Revolving = flexible repayment tied to sales or an agreed schedule; Short-term = fixed repayment schedule with a clear payoff date.

  • Cost structure: Revolving facilities may charge a variable rate or a fee on outstanding balances and sometimes a holdback on transactions. Short-term loans often show a nominal APR or a factor rate; while APR comparisons can be made, short-term products sometimes use factor rates that make the true cost higher than the advertised rate. For a primer on factor rates and APR translation, see FinHelp’s guide on short-term merchant cash advances: Short-Term Merchant Cash Advances: How Factor Rates Translate to APR.

  • Qualification: Revolving facilities are typically underwritten on average monthly card volume, time in business, and processor statements. Short-term loans may emphasize revenue and business credit, but underwriting varies widely across lenders.

  • Impact on cash flow: Revolving facilities are designed to smooth daily cash flow; short-term loans create fixed payment obligations that can stress cash flow if revenue dips.

Costs: APR, factor rates, and fees

Comparing costs requires care. Many merchant-facing products use nonstandard pricing:

  • APR vs. factor rate: Traditional loans advertise APR. Merchant cash advances and some short-term offers use a factor rate (e.g., 1.15), which is not the same as APR and can yield very high effective interest when converted. The FinHelp glossary has an in-depth explainer on converting factor rates to APR for short-term merchant cash advances (internal link above).

  • Fees to watch for: origination fees, daily ACH or remittance fees, processing splits, holdbacks (a percentage of card receipts retained), prepayment penalties (or the absence of them), and monthly or maintenance fees.

  • True cost examples: A $25,000 short-term loan with a factor rate of 1.25 means you pay $31,250 total; the effective APR depends on the term and payment schedule and can exceed 40–100% for very short terms. Always ask lenders to show the APR or the total repayment schedule and compute the effective annualized cost.

Eligibility and underwriting

  • Revolving merchant facility: Lenders look at merchant processing history (usually 3–6 months minimum), average monthly card volume, chargeback rates, and the stability of card receipts. Personal or business credit may be reviewed but is often secondary to processor data.

  • Short-term loan: Underwriting can be broader: revenue, time in business, bank statements, business credit scores, and sometimes a personal guarantee. Lenders differ widely; some alternative lenders will approve with minimal documentation but at higher price points.

Regulation and consumer protections differ for small-business owners compared to consumers; the Consumer Financial Protection Bureau (CFPB) has resources on business and small-business lending policies and risks (see ConsumerFinance.gov) and recommends thorough contract review before signing.

Typical use cases and examples

  • Use a revolving merchant facility when: you have predictable but variable card sales, you need ongoing access for inventory or payroll, and you want to borrow only what you need. Example: a retail shop draws $10,000 in September to buy holiday inventory, repays $8,000 after strong sales, and then draws again in January to restock.

  • Use a short-term loan when: you need a fixed amount for a discrete purpose and can commit to set payments. Example: a contractor borrows $50,000 to buy equipment to fulfill a single large contract, repaying within 9 months as project invoices are collected.

For deeper reading on merchant cash advances and how they compare to other short-term options, see FinHelp’s articles: Merchant Cash Advances Explained: Costs, Uses, and Risks and Short-Term Merchant Financing: Comparing Advances, Lines, and Loans.

Risks and common pitfalls

  • Misreading cost disclosures: Lenders sometimes present factor rates or weekly remittance terms that hide the annualized cost. Ask for an APR-equivalent or a full amortization schedule.

  • Over-committing fixed payments: Short-term loans with fixed monthly payments can hurt cash flow in slow months. Stress-test your income before accepting fixed obligations.

  • Relying only on card-volume underwriting: Revolving merchant facilities that rely heavily on processing history may be reduced or recalled if chargebacks spike or card volumes drop.

  • Automatic remittance drains: Some merchant facilities take a daily share of sales. If your sales dip unexpectedly, those pulls can compound cash-flow trouble.

How to choose: a short decision framework

  1. Define the need: ongoing flexibility vs. one-off capital.
  2. Model cash flow: project worst-case months and test whether you can absorb required remittances or loan payments.
  3. Compare total cost: request a full repayment schedule; convert factor rates to APR for apples-to-apples comparison. Use the SBA and CFPB resources as a baseline for conservative assumptions.
  4. Check contract terms: look for holdbacks, prepayment terms, default clauses, and personal guarantees.
  5. Consider alternatives: business lines of credit, SBA loans, or traditional bank lines often have lower cost but take longer to approve. See FinHelp’s comparison pieces for deeper context: Merchant Cash Advances vs. Business Lines of Credit.

Applying and negotiating

  • Gather documents: processor statements (past 3–6 months), bank statements, recent tax returns, and a simple cash-flow forecast.
  • Ask specific questions: how is my repayment collected, is there a holdback, what is the total repayable amount, and is there a prepayment benefit or penalty?
  • Negotiate fees and holdbacks: some lenders will lower origination fees or adjust the holdback percentage for stronger-quality accounts.

Professional tips

  • Use a revolving facility for inventory cycles and short-term working capital gaps; use short-term loans for capital expenditures with clear payback sources.
  • Build relationships with lenders so you can renegotiate limits or terms when your business improves.
  • Track effective borrowing cost monthly and compare it against revenue generated from the financed activity.

Frequently asked practical points

  • Can you convert a short-term loan into a revolving facility? Sometimes — refinance options exist, but you should model costs before refinancing.
  • Do merchant facilities report to business credit bureaus? Some do, but many do not; ask upfront if you want activity to build business credit.

Conclusion

Both revolving merchant facilities and short-term loans have a place in a small-business financing plan. Revolving options offer flexibility and utility for ongoing operational needs, while short-term loans provide certainty when you need a fixed sum for a specific purpose. The right choice depends on your cash-flow variability, ability to absorb fixed payments, and the true cost of funds once all fees and repayment mechanics are considered.

Professional disclaimer: This article is educational and does not substitute for tailored legal, tax, or financial advice. Consult a qualified advisor about your situation. For tax treatment of interest and business borrowing, consult the IRS small-business resources (IRS small business guide). For consumer protection and small-business lending guidance, see the Consumer Financial Protection Bureau (CFPB).

Authoritative sources