If you’ve ever run your own business, you know that funding can be a major obstacle.
Automated Clearing House loans (sometimes called an ACH advance or cash flow funding) can help you get your finances in order and allow you to take care of the day-to-day expenses that come with running a business—whether you need capital to purchase equipment, lease office space or pay employees.
So, what’s an ACH loan and how can it benefit your business?
What Is Automated Clearing House?
ACH stands for Automated Clearing House and it’s a network of more than 10,000 financial institutions throughout the United States 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.
An ACH debit transfer occurs when a borrower allows a third party lender, merchant or vendor direct access to their 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.
What Is an ACH Loan?
ACH loans encompass a broad category of financing products that are unique in the way they’re paid and structured.
ACH loans aren’t “loans” by definition – 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 automated daily (weekly or monthly) ACH draws from your business bank account.
ACH payments are easier for lenders to accept because the costs are lower to process a payment. An ACH payment also allows for more frequent direct debits – daily or weekly – and gives the lender an opportunity to discover any potential repayment issues, early. It also helps the borrower avoid late payments, as the draws are automatic.
Let’s take a look at how ACH payments benefit both the lender and the borrower.
Benefits of an ACH Business Loan
An ACH loan benefits both the borrower and the lender and allows for a smoother transaction each and every time a payment is made.
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
The benefits of an ACH business loan for borrowers include:
- Quick and easy approval process
- Scheduled and automatic payments
- Lenient credit score requirements
- No collateral requirement
ACH Lending for Bad Credit
Historically, if you had bad credit, you most likely wouldn’t qualify for a business loan. But thanks to alternative lending solutions, there are more options now than ever for small business financing.
The ACH network is actually great for people with bad credit because oftentimes, credit is a small factor in the loan decision.
The most important things are your business’s viability and future cash projections. A lender will review your company’s deposits and cash flow statements to assess the average daily balance of your business checking account. If they’re confident that your business has enough cash on hand to sustain operations while meeting repayment obligations, your application will likely be approved.
This means if you need to take out a business loan, but you have less than perfect credit, you can still get the funding you need to run your business and grow.
Other business loan options for borrowers with bad credit include:
- Invoice financing. Invoice financing is when lenders allow you to access advances for outstanding invoices from your clients. Lenders can offer you a cash advance equal to around 85 percent of the outstanding invoice amount. Companies that provide invoice financing typically charge a flat fee – about 3 percent – to process the transaction, and then another fee charged every week the invoice remains unpaid (about one percent).
- Short-term loans. Short-term loans typically last between 3 and 18 months and usually have an easy application process. However, these tend to have higher APRs and the frequent payment schedule can cut into your cash flow quickly. Your score can be as low as 540 to qualify.
- Equipment financing. Equipment financing allows you to borrow money to buy equipment for your business, whether it’s salon chairs and dryers or racks and shelves. The great thing about equipment financing is that it’s self-securing. Credit scores as low as 620 may qualify for this kind of financing.
- Short-term lines of credit. Short-term lines of credit offer repayment terms of less than 18 months and have a revolving credit limit. Though they come with higher APRs and lower credit limits than longer-term business lines of credit, this is still a great option for those with bad credit and limited options.
- Business credit cards. If you have poor credit – or very little credit – a business credit card could be a great option for you. A business credit card is essentially a business loan and a credit card rolled into one. A business credit card can help you cover important business expenses and build your business credit profile at the same time. But just like a regular credit card, it’s important to make sure you pay on time and never take on more debt than you can handle.
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
Your prospective lender will let you know if you’ve been approved and for what amount fairly quickly. In fact, the whole process, from application to funding, can happen in a matter of days—sometimes as fast as the same day.
Tips for Making ACH Business Loan Repayments
Your repayment amount will be automatically withdrawn on a certain date in daily, weekly or monthly intervals, depending on the terms and conditions of the loan.
Make sure you have 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. And it’s also important to understand the payment terms, such as what will happen if you don’t have enough funds in your account to cover your ACH loan repayment.
Whether you’re in your first few years of business or you’re a seasoned entreprenuer, an ACH loan can help you get the capital you need to sustain your operations and grow. Whatever route you choose to take in terms of ACH loan options, make sure you borrow responsibly.
Now that you know what an ACH loan is and how it can benefit your business, you can start contemplating your next steps. Access to business capital could be just days away.