ACH Transfers: How Do They Work?

Many small-business lenders, including traditional lenders like banks and credit unions, are enabling small-business borrowers to make their periodic loan payments via direct debit from their business banking accounts.

This type of payment process is good for both the lender and the borrower.

So let’s talk about what an ACH transfer is and why it’s good for both you and your business loan provider.

It’s been a long time since I wrote an actual check to make a car payment or pay my mortgage. These days, those payments are made through a scheduled direct withdrawal (or debit) from my personal checking account. It’s likely the same for you.

What’s more, my paycheck is also directly deposited into my checking account. In fact, I can’t remember the last time I actually deposited a physical paycheck.

Those are all ACH, or automated clearing house, transfers.

According to the National Automated Clearing House Association (Nacha), in 2021 (the most recent statistics available), the ACH network volume reached nearly 29 billion payments, with a dollar amount of $72.6 trillion.¹ That’s a lot of dollars that are safely transferred from one bank account to another every year via an ACH or electronic funds transfer.

There are a number of reasons why lenders like ACH transfers. For example, this type of payment reduces the costs associated with processing a loan payment. And an electronic debit that’s processed more frequently than monthly (sometimes daily or weekly, depending on the lender) allows many lenders to identify potential repayment issues early—so they can help borrowers catch up on any missed loan payments before they find their business in default.

However, ACH transfers aren’t just good for small-business lenders; they’re good for small- business borrowers too.

It probably makes sense that lenders would embrace regularly scheduled electronic periodic loan payments, but why is this a good thing for small-business borrowers?

When loan payments are scheduled via an ACH transfer, there is a greater likelihood that loan payments will be made on time. Because timely loan payments are the single biggest influencer to help build a strong business credit profile, those timely payments will help you build a strong profile.

Because an ACH transfer helps a lender mitigate some of the risk associated with taking loan payments, some borrowers who might not qualify for a small-business loan within a more traditional payment model can access borrowed capital when the risk of missed periodic payments is reduced.

Although there are several reasons making business loan payments via an ACH transfer could make sense for your business, you should ask yourself some questions before you sign on the dotted line. This is particularly true if your lender expects you to make daily or weekly periodic payments.

This is really a question about how cash flows through your business. If most of your cash comes into your business at the end of the month, a daily or weekly ACH debit from your business bank account might not be the right solution for your business and could disqualify you with lenders that require weekly or daily periodic payments.

This is one reason lenders want to see several months of your business bank statements. They are trying to determine if you have the right kind of cash flow to support the more frequent payment schedule.

Depending on the lender or other provider (like a merchant cash advance, or MCA, provider), the payment could be fixed or variable. Most lenders will transfer a fixed amount with every payment, while an MCA provider will typically transfer an agreed-upon percentage of what’s deposited in your credit card merchant account every day.

When the transfer happens is an important question to ask before the first payment is debited. Are payments only on business days, or are they also on weekends and holidays?

Many of us are familiar with something like an auto loan where the first payment is due the month after the loan is issued. If you are making daily periodic payments, don’t assume that your first payment won’t be due until the month following your loan approval. It will more than likely be the following business day. Understanding when the first payment is due will help you be prepared rather than surprised when that first ACH debit takes place.

I think it’s safe to say that nobody wants to see insufficient funds to make a transfer, which is why lenders spend time looking at cash flow in addition to revenue before they approve a loan application. But even with a creditworthy borrower, there may still be times when a business owner’s bank account doesn’t have sufficient funds to accommodate an ACH transfer.

Although most business owners work to ensure there is always enough money in the account to make their loan payments, sometimes unforeseen circumstances can make that problematic. Fortunately, you will likely know in advance if you are going to be short so you can notify your lender before the transfer is attempted and make other arrangements.

Most lenders are willing to work with borrowers facing legitimate challenges and can work out a missed payment. On the other hand, it’s never a good idea to say nothing and allow the lender to try to transfer the payment when there aren’t sufficient funds in the account.

Scheduling automatic electronic payments via ACH transfers makes the payment processing convenient and easy for both the borrower and the lender. What’s more, it makes borrowed capital available to some small-business owners who might not otherwise have access to borrowed capital. Overall, this is a technology that really benefits small businesses—and it could benefit you.

Ever wondered why your personal credit score matters to small-business lenders? Business.org has the answer.