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An advance or a short-term loan for the same net proceeds
Identical money in your account, and one of them has no maturity date. Which one is cheaper depends entirely on which way your sales move after you sign.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
A short-term loan obliges you to repay a fixed sum on fixed dates. An advance does not: it buys a percentage of future receipts, and the contract's whole legal position depends on there being no absolute obligation to repay. That difference is why one has an interest rate and a maturity and the other has a factor rate and a reconciliation clause, and why a bad month does two completely different things to you.
It is also why the two cannot be ranked on a single number. A factor rate has no time dimension at all. The cost of an advance is fixed the day you sign; what is not fixed is how long you take to pay it, and that is the only thing that determines whether it was expensive.
The two deals
- The advance. $50,000 funded, factor 1.35, so a purchased amount of $67,500 and a cost of $17,500. The specified percentage is 12% of collections.
- The loan. $50,000 funded, total repayment $61,500, so a cost of $11,500, repaid in nine fixed monthly instalments of $6,833.33.
At $85,000 of monthly revenue the advance remits $10,200 a month and clears in about 6.6 months. Side by side at that revenue level, the loan is cheaper — $11,500 against $17,500 — and anyone comparing them at the moment of signing picks the loan.
Where the advance wins
- The advance's remittance falls with collections: 12% of $51,000 is $6,120 a month. The term stretches to about eleven months. You keep trading.
- The loan's payment does not move. $6,833.33 is due on the date it is due, from cash flow that is 40% smaller. Miss it and you are in default, with acceleration, default interest and a called personal guarantee on the table.
The monthly relief is $713.33 — not dramatic on its own. What matters is that the advance's obligation is defined as a share of what you actually collect, so the shortfall never arrives. The loan converts a revenue problem into a solvency problem. The extra $6,000 of cost bought insurance, and in that month it paid out.
This only holds if the reconciliation right is real. Read the clause: some are mandatory on request with a defined lookback, some are discretionary, and a discretionary one is not protection.
Where the loan wins
The advance now remits $13,260 a month and clears in about 5.1 months. The $17,500 cost is unchanged — it was fixed at signing — but you paid it across five months instead of nine. Expressed as a simple annualised figure on the amount funded, that is roughly 82%. The same advance stretched over eleven months would be about 38%. The loan's $11,500 over nine months is about 31%.
None of those are APRs and none of them should be written down as one; they are one way of putting a fixed cost on a time axis so you can see what growth does. And what growth does is brutal: succeeding makes the advance more expensive, because success shortens the only variable that was working in your favour.
What an early payoff does on each
On the loan, check whether interest is simple or precomputed. If simple, paying early saves the interest you never accrue. If precomputed, it does not, and a rebate clause decides what you get back.
On the advance, the cost is not interest and does not accrue. Paying early saves nothing at all unless the contract contains an early payoff discount with a schedule attached. Salespeople describe early payoff as saving money on both products. On one of them that is simply false.
The questions that settle it
- What happens to my remittance if revenue falls 40%? Ask for the answer with a clause reference. If the funder's reconciliation is discretionary, treat the advance as having a fixed payment and price it accordingly.
- Is my revenue trend up, flat or down over the next two quarters, and how confident am I? Confident growth argues for the fixed obligation. Uncertainty argues for the variable one.
- What does the loan's default clause accelerate, and what does the advance's clause do instead? Read both event of default lists. They are not similar documents.
- Does either agreement restrict additional financing? Advances usually contain an anti-stacking clause. If your plan involves borrowing again in six months, that clause is a material term.
What to ask for, and what to refuse
Ask the advance funder for the reconciliation clause by number, the lookback period it uses, how often you may request an adjustment, and what documentation triggers one. Ask for the total dollar cost and the specified percentage in the same sentence.
Ask the lender whether interest is simple or precomputed, for the payoff figure at month three and month six, and for every fee outside the rate.
Refuse to accept "it works out about the same as a loan at X%" from anybody. Ask them to show the arithmetic including the number of months. Refuse an advance whose reconciliation is described verbally but does not appear in the contract. And if the funder will not state in writing what happens to the remittance when collections drop, you have learned the answer.
Where this applies
Related questions
What does this guide cover?
Identical money in your account, and one of them has no maturity date. Which one is cheaper depends entirely on which way your sales move after you sign.
Which funding products does this apply to?
Merchant Cash Advance, Working Capital, Term Loan. Each has its own page listing the funders in this directory that offer it and what each one publishes about its terms.
Is this specific to restaurants?
It is written around how a restaurant business actually generates and collects cash, which is what makes its funding problem different. The mechanics transfer; the arithmetic may not.
Who writes this?
The Find Me Funders research desk. Some drafting is AI-assisted, and every page that is says so at the top, including whether a person has checked its claims yet.
How do I know a figure here is right?
Where a page carries the green notice, its claims were checked against the sources listed at the end and a reviewer is named. Where it carries the amber one, nobody has verified it yet and you should confirm anything you plan to act on.
Are the examples real deals?
No. Every worked example is labelled illustrative and exists to show the arithmetic. What any particular lender charges is on that lender's page, where it publishes it.
Why do you never say what a typical rate is?
Because we cannot source it. A market average assembled from lenders who do not publish prices is a guess with a decimal point on it. Where a lender publishes a figure, we show that figure and say where it came from.
Is this financial or legal advice?
No. It is general information about how these products work. Outcomes depend on your contract and your state, and a lawyer or accountant licensed where you are is the person to ask about your situation.
Can I reuse this content?
Quote a paragraph with a link back. Do not republish whole articles.