An Automated Clearing House (ACH) loan can help your small business quickly obtain funding without meeting the strict credit and financial requirements of conventional bank loans.

Indeed, ACH business loans are repaid to lenders through automatic withdrawals from your business’s bank account.

ACH loans—sometimes referred to as ACH advances, ACH cash loans, ACH lines of credit or ACH cash-flow loans—are accessible to small business owners with bad credit because automated payments reduce the risk for lenders. Another benefit is that applying for an ACH loan requires minimal documentation. 

What Is the Automated Clearing House?

The Automated Clearing House is a network of more than 10,000 financial institutions throughout the U.S. that coordinate the transfer of electronic money from one bank account to another. Each year, the ACH network transfers more than $43 trillion and handles roughly 25 billion transactions.

While ACH loans offer faster and more attainable small business funding than conventional bank financing, the main drawback is typically higher fees.

What Is an ACH Loan?

ACH loans refer to types of business financing that are repaid in a certain way—specifically, through automatic withdrawals.

An ACH debit transfer takes place when a borrower allows a third-party lender, merchant or vendor direct access to a business checking account. (Most electronic payments in the country are made through an ACH network, including payroll deposits, government transactions, business-to-business ACH and consumer transactions.)

To be clear, ACH loans aren’t actually loans by definition. Rather, they’re advances. When you enter into an ACH agreement, you’re pledging a portion of your future revenue in exchange for a lump sum of cash. After a business is funded, a borrower remits payment to the lender through ACH withdrawals from your business bank account at set intervals—monthly, weekly or even daily.

The bottom line is this: ACH financing is best for short-term financing and loan amounts are typically smaller than other funding options. When you apply for an ACH business loan, lenders will review the average daily balance of your business checking account instead of your credit score.

With an ACH agreement, you’re pledging a portion of your future revenue in exchange for a lump sum of cash.

ACH vs. MCA

ACH loans are a variation of merchant cash advances (MCAs).

With a typical MCA, a lender will deduct a percentage of your credit or debit card sales on a set interval (usually daily or weekly). This means your payment shifts based on the pace of your business income, helping you avoid cash-flow disruptions during sales slumps.

ACH loans are based on the total projected revenue of your business rather than just credit- and debit-card transactions. This is why lenders review the health of your business checking account. As a result, your ACH loan payment is fixed over a set term—regardless of your sales volume.

Pros of an ACH Business Loan

Using an ACH loan for cash-flow benefits both the borrower and the lender and allows for a smoother transaction each and every time a payment is made.

Advantages of an ACH business loan for borrowers include:

  • Quick and easy approval process
  • Scheduled and automatic payments
  • Fixed loan payments
  • Lenient credit score requirements
  • No collateral requirement

The benefits of an ACH business loan for lenders include:

  • Business bank account verification
  • Facilitating quick and easy electronic loan payments
  • Lower fees than check and credit-card processing
  • Electronic records of all payments made
  • Reduction in the cost of money transfers

Advantages of ACH loans include scheduled and automatic payments.

Cons of an ACH Business Loan

There are disadvantages to ACH loans, including:

  • Higher factor rates
  • Small loan amounts
  • Daily or weekly payments may be too frequent
  • Terms can be inflexible once set

What is a Factor Rate?

A factor rate is a decimal figure that is multiplied by the total loan amount to calculate the complete cost of borrowing. Factor rates often start at 1.1 and rise from there.

A factor rate is calculated only once, at the beginning of the lending period. Paying off your loan early won’t lower your total repayment.

How to Apply for an ACH Business Loan

Applying for an ACH business loan requires several pieces of information including:

  • Driver’s license
  • Signed application
  • Bank statements for the last 3-6 months
  • Business license
  • Voided check

ACH loans are an option for small businesses with bad credit because cash flow has more bearing than credit in the lender’s decision. Indeed, lenders consider a company’s viability and future cash projections as well as review deposits and cash-flow statements to assess the average daily balance of the business checking account. 

If a prospective lender is confident that your business has enough cash on hand to sustain operations while meeting repayment obligations, your application will likely be approved fairly quickly. The whole process, from application to funding, can happen as fast as the same day.

If you’re searching for business financing but have bad credit, other funding options include:

  • Invoice financing
  • Short-term loans
  • Equipment loans
  • Short-term lines of credit
  • Business credit cards

Tips for ACH Loan Payments

Whether you’re in your first few years of business or you’re a seasoned entrepreneur, an ACH loan can help you get the capital you need to sustain your operations and grow. Here are some final reminders about ACH loans:

  • Your ACH payment amount will be automatically withdrawn on certain daily, weekly or monthly intervals, depending on the terms and conditions of the loan.
  • Maintain a decent cash flow so that you can handle the loan payments. For example, if your income is dependent upon subscriptions that usually renew at the end of the month, you might not want a daily or even weekly ACH payment being debited from your account. 
  • Review all payment terms, such as penalties if you don’t have enough funds in your account to cover your ACH loan repayment.

Whatever route you choose to take in terms of ACH loan options, make sure you borrow responsibly.

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