More than 25.5 billion Automated Clearing House (ACH) payments totaling about $43 trillion were made in 2016, according to NACHA statistics. NACHA is the organization that manages the ACH, which is the main network that processes most of the electronic debit and credit transactions in the United States, and is funded by the financial institutions it governs. That 2016 figure is an increase of about 1.3 billion from 2015, which represented growth of 5.4%.
As consumers move further away from paper money and shift to move toward an electronic, interconnected and mobile infrastructure, it’s no surprise that the number of ACH payments continue to rise each year. As a merchant, you may wonder how the ACH fits into a business loan and how can it benefit your enterprise? An ACH business loan is a way for small businesses to get capital to pay for more inventory, buy some new equipment, or help you cover the day-to-day operation expenses until you can get off the ground and grow.
What is an ACH business loan?
An ACH business loan is no different from a small business revenue-based loan, small business cash flow loan, or a small business merchant cash advance. The ACH or Automated Clearing House designation is what separates it from the rest. ACH impacts how a lender is paid. An ACH business loan allows a lender, such as a merchant account provider, to withdraw a specific agreed upon amount directly from your checking account on agreed up times. Withdrawals can be made daily, weekly, or monthly depending on your agreement with the lender. This type of loan withdrawals money similar to the way automated payments are made to a utility company. Instead of billing customers and collecting payments from them, they pay you by making direct payments to your checking account.
How ACH business loans differ from small business loans
An ACH business loan is a great short-term financing option for a small business. Though interest rates are higher, you get access to capital much quicker than you would if you had a traditional term loan with a bank. Since a lender can withdraw your payment right from your account, it reduces the risk to lenders. Also, an ACH business loan can be approved for most businesses that maintain healthy checking accounts. Unlike small business loans, merchants can borrow money even if they have no credit or poor credit. The approval of an ACH loan depends on the merchant’s checking account balances not its credit card processing. Because how much is in the bank matters, borrowers will need to provide bank statements for three or four months to show how much money is in the account on a regular basis.
Finally, while traditional loans require a monthly payment, ACH loans often either required a fixed daily or weekly electronic payment.
A win-win situation for borrowers and lenders
Lenders like ACH payments because the funds are directly debited from a borrower’s account. Since lenders are withdrawing the funds themselves instead of waiting for a payment to arrive, they know they are more likely to get paid.
Borrowers save money because they don’t need to pay for paper checks and postage for their loan payments, and it’s more convenient because most ACH withdrawals are scheduled and automatic.
ACH payments often are easier for borrowers to handle. Since payments are made more often than traditional loans, the amounts usually are smaller. When you are a small business, it is easier to juggle a smaller weekly payment than a large monthly payment that is due at the end of the month with lots of other expenses.
Finally, if all of your payments are met and are withdrawn during the specified times, you are building your business credit profile. Doing this can make you more attractive to lenders when you want to take a more significant loan.
Is an ACH business loan right for your business?
Since a lender looks at the average daily balance of your business checking account instead of your credit card transactions, consider these three factors before applying for an ACH business loan:
1. Make Sure Your Cash Flow Supports Your Payments: Lenders want to see at least three months of bank statements because they want to make sure they have a good idea of how money is going in and out of your checking account on a regular basis. If you receive most of your payments at one time during the month, daily or weekly ACH loan payments may not work for you.
2. Understand Payment Withdrawals: Before you sign on the dotted line with a lender, know how much will be withdrawn and the frequency. If they are taken daily, does that include the weekends? Is the payment a fixed amount? The more questions you ask, the better you will understand your payments. If you thoroughly understand them, you will be able to budget for them accordingly.
3. Know the Penalties: If a lender tries to withdrawal a payment and there aren’t enough funds in your checking account, what happens? Does that mean you defaulted on your loan? Does it impact your rates? Most importantly, you need to have these discussions before you run into this situation. Things happen but it is always better if you take a proactive approach. Also, if you know a payment scheduled to come out and you are running short on cash, contact your lender to see if you can make other arrangements.
The bottom line
Making business loan payments electronically makes the transaction seamless and simple for lenders and borrowers. If you need a short-term funding option, consider applying for an ACH business loan with merchant services provider, First American Merchant (FAM). We are a trusted, reliable payment solutions provider that specializes in working with high-risk businesses, as well as businesses of all sizes.