Small Business ACH Loans. What Are They and How Can They Benefit My Business?

What is an ACH Small Business Loan and How Can it BOOST My Business?

For starters, an ACH small business loan can also be referred to as a small business cash flow loan, small business revenue based loan or a small business merchant cash advance. The ACH designation really applies to how the lender is paid. ACH or Automated Clearing House, refers to the lenders ability to withdraw an agreed upon amount directly from your checking account at agreed upon intervals, typically daily or weekly. This is different from factoring your accounts receivable (A/R), because instead of billing your customers and collecting from them, they directly access your checking account in much the same way automated payments might go to you mortgage lender or a utility company from your personal checking account.

An ACH small business loan, much like factoring or an MCA loan, should be considered a small business short-term financing option. The cost of the capital is more expensive, in other words you’ll pay a higher interest rate, but you’ll be able to access that capital much quicker than a traditional term loan from the bank or other financial institution.

Because a small business ACH loan lender will be able to pull your payment directly from your checking account, it reduces risk to the lender making it possible for small business owners with a healthy checking account but less-than-perfect credit to get a loan.

The Automated Clearing House (ACH) is a network for processing electronic credit and debit transactions in the United States. An ACH debit transfer occurs when you explicitly allow a third party (a vendor, merchant, or a lender) to have direct access to your business checking account to withdraw funds agreed upon by you. Roughly 90 percent of all electronic payments are handled through the ACH network, and include direct payroll deposits as well as electronic payments.

Many small business loan lenders prefer to accept your business loan payments through an ACH transfer directly. If your mortgage, or an automobile payment, is pulled directly from your checking account every month, an ACH or electronic small business loan payment works much the same way.

For example, most small business revenue based loans, business cash flow loans and online small business lines of credit come with either a fixed daily (every business day) or weekly ACH payment. Repayment for a small business line of credit is automatically deducted on a weekly basis. While some lenders still accept payment by check, electronic payments have become increasingly common, particularly with online lenders.

Electronic Payments are Good for the Lender and Good for the Borrower

A daily or weekly ACH debit makes sense for lenders because it reduces the costs associated with processing a loan payment, ensures that payments are made in a timely fashion, and makes it possible for the lender to identify potential repayment issues within a couple of days, rather than several weeks—giving them enough time to try to help borrowers get back on sound financial footing and meet their commitments.

  • ACH payments save the business owner money - roughly $1.22 per check
  • It is convenient for the borrower who doesn’t need to take the time to write a check (particularly if the ACH debits are scheduled and automatic)
  • The regular and timely payments help build and maintain a strong business credit profile

Daily or weekly debits, as opposed to a monthly debit, reduces the size of each periodic payment making it easier for many borrowers to smooth their cash flow and avoid contributing to “lumpiness” in having large expenses due at the end of the month. This type of electronic direct debit makes capital available to some borrowers who might not qualify within a more traditional payment model.

Making ACH Business Loan Payments Work for Your Business

Millions of ACH transactions happen every day, but that doesn’t mean much if you can’t make it work for your business. With that in mind, here are 3 things that will help you do just that:

#1. Make sure you have the right kind of cash flow to accommodate the periodic payment frequency. If most of your monthly revenue is attributed to a handful of customers that make payments at the end of every month, a daily or weekly ACH pull from your business checking account might not work and may disqualify you from some loan types. This is one reason most online lenders want to see the last three or four months of bank statements. They want to make sure your cash flow will support the debit frequency (daily or weekly).

#2. Make sure you understand the amount that will be pulled with every periodic payment: A fixed payment will likely be easier to budget for. You’ll also want to determine if payments are only made on weekdays or if they will also take place on the weekends. The more you understand about the process upfront, the better you will be able to budget and prepare for each periodic payment.

#3. Make sure you understand what happens if you don’t have sufficient funds in your account: Nobody wants this to happen, but if it does, what does that mean for your loan? Making sure there is always enough in the account to make the automatic payment needs to be a priority, but sometimes circumstances might leave a business owner short. Most of the time, you’ll know before the payment is due. If that’s the case, reach out to the lender before the payment is attempted to try to make other arrangements.

Making payments electronically is an innovation designed to make small business loan payments seamless and easy for both the borrower and the lender. Ready to see if an ACH small business loan makes sense for your business? Call (855) 998-5874 or click below.