ACH Loan Definition: Pros & Cons of ACH Business Loans

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Established businesses with good credit ratings can access many types of financing besides ACH loans. Businesses that get ACH loans typically can’t. If a relatively new business gets an ACH loan, the small business owner or CEO founder can avoid loading a personal or business credit card with business bills.

For some small businesses, these small, riskier ACH loans may work. Consider an ACH business loan when you need more cash for a short time to pay bills before generating sales. 

What is an ACH Loan?

An ACH loan is short-term loan financing for companies lacking good or established business credit, not requiring collateral, with higher interest rates. ACH loans have strict recurring repayment terms through ACH (Automated Clearing House) withdrawals from the borrower’s bank account by the lender. An ACH loan is called an ACH e loan, cash flow loan, or ACH advance. 

How Do ACH Loans Work?

ACH loans work for some companies with subpar credit. A business applies for an ACH loan with a lending company that offers ACH loans. The lender performs due diligence on the ACH loan applicant’s business but doesn’t require collateral. The applicant’s business credit score isn’t considered for ACH loan approval. 

The loan company’s due diligence, underwriting, and approval processes include:

  • Assessing the business applicant’s average daily balance at their financial institution for several recent months
  • Validating the proposed borrower’s business checking account for authenticity to avoid fraudulent loans
  • Reviewing the borrower’s transaction history of ACH payment processing
  • Reviewing the applicant’s business revenue history (to assess their ability to repay the loan if revenue trends persist)

An approved borrower signs the loan document. The loan document includes an ACH authorization form for repayment, with their bank routing and business bank account number. 

The business borrower receives an electronic ACH direct deposit transfer for the loan amount within a few days in their business bank account. The ACH loan agreement sets up weekly or monthly electronic ACH loan payments that are automatically made from the borrower’s checking account via ACH debit transactions. 

Repayment of an ACH loan for business works like a payday loan for individuals when ACH authorization is used for repayment from the borrower’s bank or credit union account. The Consumer Financial Protection Bureau (CFPB), an agency of the U.S. government, regulates payday loans. 

The CFPB offers advice regarding ACH authorizations requested by a lender to receive repayments for a payday loan. The following CFPB advice also applies to a business ACH loan:

“If you have problems with a payment authorization, such as the ACH was unauthorized or revoked, you may want to contact your state regulator or state attorney general.

Tip: Be sure that you can afford to repay the loan. If you don’t have enough money in your account when the lender attempts a withdrawal, your loan will be delinquent. This might result in the lender charging you a late fee, and your bank or credit union charging you a “bounced check” or non-sufficient funds (NSF) fee.”

Pros of ACH Loans 

Pros of ACH loans include:

  • Provides short-term financing when internal cash flow won’t cover bills 
  • Source of funds for businesses with subpar credit or no established credit history
  • No collateral required
  • Cash received within one to three days

Cons of ACH Loans

  • Small maximum loan amount
  • High interest rate 
  • ACH loans from some lenders include hidden costs and prepayment penalties
  • For repayment, the lender sets mandatory dates for taking scheduled recurring cash payments from the borrower’s bank account via ACH transfer
  • For timely repayment, the business must receive sufficient future cash flows from sales (Repayment of ACH loans has priority over other cash flow needs because automated recurring ACH payments are scheduled.)

Who Uses ACH Loans?

Early-stage companies that haven’t yet established credit and small businesses with poor credit scores (not qualifying for other sources of financing) use ACH loans. These businesses have adequate daily average bank balances and a sufficient history of business revenues but are experiencing a temporary cash flow shortfall. 

Businesses using ACH loans have been operational for at least three to six months. 

According to the Federal Reserve Banks’ report titled Small Business Credit Survey: 2021 Report on Employer Firms:

“Firms with lower credit scores turned to online lenders (35%) and nonbank finance companies (23%) much more often than did their counterparts with higher credit scores (11% and 11%, respectively).”

According to this same Federal Reserve Banks 2021 report, 8% of loans that applicants applied for were merchant cash advance loans (another name for ACH loans).  

How Long Does an ACH Loan Take?

Online ACH loans are approved or denied very quickly by lenders. Within one to three business days, borrowers receive the loaned cash electronically. The borrower receives a cash deposit in their business bank account via an ACH transfer from the lender. 

Example of ACH Loans for Businesses

Clarify Capital is a loan broker working with over 75 lenders to place business ACH loans for applicants completing a two-minute online application or a phone call application. Businesses must have three to six months of operations to get a short-term (2 months plus) ACH loan. 

Business applicants submit the amount of funding they would like to receive through an ACH loan. Clarify asserts that prequalification will not harm the credit score of a business. 

Approved applicants receive funds in their bank account via ACH transfer from Clarify as quickly as 24 hours after the loan approval. (Generally, allow up to three business days to receive cash for an ACH loan.)

Clarify Capital may be one of the ACH loan brokers you consider when seeking an ACH loan. 

How to Apply for an ACH Loan

Compare lenders offering ACH loans for total loan amount available, interest rates (including APR), fees, costs, and prepayment penalties. Complete the loan application, which is likely available online. Furnish the number of recent monthly business bank statements required by the lender (possibly three to six) and any other documents they request, like a copy of your driver’s license and voided check from the business. 

Importance of ACH Loans

ACH loans are one type of financing to consider as a very short-term “bridge loan” for companies in different industries without an established or good credit rating. But your business will pay the price with high interest rates and the inflexibility of when to repay the loan. 

ACH loans require automatic periodic payments on scheduled dates. The ACH lender makes these recurring ACH withdrawals from the business bank account. A borrower can’t change the required payment dates.

Before deciding to get an ACH loan for your business, thoroughly research ACH loan financing. Check the feasibility of other types of small business financing, like an SBA bank loan or a line of credit, for which your company may qualify. Your research should include:

  • Gather facts by reading about ACH loans and financing options from multiple sources 
  • Get quotes from several lenders or loan brokers (including interest rates, loan fees, and costs) to compare terms, loan amount, and costs
  • Inquire to ensure that loan applications won’t adversely affect a credit score
  • Forecast anticipated business cash flows by week 
  • Decide if your business would generate enough cash flow through sales and working capital to make the scheduled ACH automatic payments on time
  • Ensure that your business can avoid ACH loan and cash flow pitfalls 

ACH loans are not always the right choice for a business. But they may work in some situations to temporarily increase the cash balance in a company with subpar credit that lacks financing alternatives. After doing your due diligence, decide whether an ACH loan makes sense for your business in a higher interest rate economic environment. 

Do enough research about the meaning and nature of ACH loans before committing your business to ACH loan financing with its higher interest rates and automatic scheduled electronic payments.

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