The plan is for a BID to be implemented in August or September this year following a vote in vote in favour from local businesses.
A BID is a defined area in which all businesses must pay a charge, as opposed to late-night-opening businesses only paying the late-night levy, which creates a pool of money to pay for night-time services such as extra police and street pastors.
The late-night levy is a requirement for licensed premises that are authorised to supply alcohol between midnight and 6am to pay between £299 and £4,400 depending on the rateable value of their property.
Chief executive of the British Beer & Pub Association (BBPA) Brigid Simmonds said: "It is very encouraging to see Cheltenham looking to abandon its late-night levy and move towards a much more productive policy in the form of a Business Improvement District."
She added: "Local pubs are unfairly burdened by the levy and the council does not need the damage it does to the local economy when partnership schemes such as BIDs are so much more effective."
Simmonds also said she hoped other councils take note of the rethink by Cheltenham Borough Council.
The council, which was the second authority in England and Wales to introduce the late-night levy, will consult on the merits of introducing a BID instead a late-night levy over the next few months.
The Association of Licensed Multiple Retailers (ALMR) also welcomed the announcement.
Chief executive of the ALMR Kate Nicholls said: "The ALMR has consistently argued for local authorities to promote voluntary and partnership schemes such as BIDs in favour of punitive measures such as the late-night levy."
She explained late-night levies put considerable pressure on venues facing rising wage and property costs, and the ALMR has always voiced its concern that levies do not effectively tackle existing problems.
Nicholls added: "Cheltenham Borough Council's decision to consult on the levy is a welcome first step and the ALMR will be liaising with the council to promote alternatives and reduce the burden for businesses."