Automated Clearing House (ACH ) financing or bank-only loans are a great approach for small businesses to get cash flow funding and capital without any credit or document requirements that a business would normally experience when getting traditional funding. ACH loans are set-up almost differently than traditional bank loans in both ACH and traditional way, the loan is repaid, and the charges linked with the loan. Here we will take a look at what is Automated Clearing House, how it is used by small businesses, as well as the advantages and disadvantages of ACH financing for small businesses.
What Is ACH?
ACH is a method of transferring the money from one bank account to another bank account by direct deposit or direct payment using ACH transactions. The ACH transactions can be structured as one-time or recurring payments. The ACH network batch processes ACH transactions that banking and financial institutions collect through one business day. The whole ACH process including direct payments and direct deposits is processed electronically.
The ACH network is almost 40 years old in the marketing and helping almost 22 billion e-transactions every year for a total of $39 trillion each year. In the first couple of months of last year, over 5 billion of financial transactions were made using ACH network, which is almost 6% increased from last year. The business-to-business transactions from ACH network were increased by 9% from last year.
How Do ACH Loans Work?
ACH loans are not loans; however it is business-to-business transaction where a lender agrees to purchase a small business’ future bank account receivables in exchange for an upfront amount of cash. After a purchase amount is set, a settlement is carried out and the business is funded through ACH, a repayment plan starts where the small business has a set amount automatically deducted every day by the ACH transfer. Payments are made to the factoring company Monday through Friday excluding holidays until the ACH cash advance is fully paid back.
How An ACH Loan Is Different Than A MCA Loan?
An ACH business loan is incredibly the same to an MCA loan in some respects, however the repayment criteria is rather different. To understand the differences it is important to understand the MCA lending. Cash advances are the sales of business’ future receivables. The merchant cash advance is repaid by withholding a portion of the business’ credit card deposits rather than bank deposits. Instead of getting fixed daily repayment, repayments are a portion of the days credit card deposits.
What Are The Advantages of ACH Funding?
There are so many advantages of getting funding from ACH cash advances. Rather than requiring a heap of paperwork like many bank and SBA loans do, the ACH lenders normally require minimal paperwork. For cash advances, alternative lenders require minimal credit. Actually, credit is not a factor in ACH financing. It is also a well-liked type of bad credit business loan. One more perk is funding under this program is really quick and the funding can be usually delivered in a couple of days.
What Are The Disadvantages of ACH Cash Advances?
The high rates are probably one of the disadvantages of ACH financing. As these loans require excellent credit and cash flow, these loans are the high risk business lending. The rates on ACH loans are quite high. The factor rate of ACH loans usually starts from 1.16 and can go up to 1.55 indicating that for every loaned dollar, you will need to pay back the borrowed amount times 1.16-1.55. One more drawback of these loans is that payment must be made on a daily basis and that can put so much stress on a business’ finances if they experience a gap between the payments from the customers.