I vividly remember the last time I wrote a check. It was yesterday. What I can’t remember is the time before that. In fact, it had been so long that I had to search through my desk to even find a check. If you’re like me, and many others, you seldom use checks anymore. In fact, millions of electronic debit and credit transactions happen every day.
What is an ACH or Electronic Debit or Credit Transfer?
The Automated Clearing House (ACH) is a network for processing electronic credit and debit transactions in the United States. An ACH debit transfer occurs when you explicitly allow a third party (a vendor, merchant, or a lender) to have direct access to your business checking account to withdraw funds agreed upon by you. Roughly 90 percent of all electronic payments are handled through the ACH network, and include direct payroll deposits as well as electronic payments.
Many lenders, including online lenders like OnDeck, prefer to accept your business loan payments through an ACH transfer directly. If your mortgage, or an automobile payment, is pulled directly from your checking account every month, an ACH or electronic small business loan payment works much the same way.
For example, most OnDeck term loans come with either a fixed daily (every business day) or weekly ACH payment. Repayment for a line of credit is automatically deducted on a weekly basis. While some lenders still accept payment by check, electronic payments have become increasingly common—particularly with online lenders.
Electronic Payments are Good for the Lender and Good for the Borrower
A daily or weekly ACH debit makes sense for lenders because it reduces the costs associated with processing a loan payment, ensures that payments are made in a timely fashion, and makes it possible for the lender to identify potential repayment issues within a couple of days, rather than several weeks—giving them enough time to try to help borrowers get back on sound financial footing and meet their commitments.
It also benefits the borrower.
- ACH payments save the business owner money—$1.22 per check according to electronicpayments.org
- It is convenient for the borrower who doesn’t need to take the time to write a check (particularly if the ACH debits are scheduled and automatic)
- The regular and timely payments help build and maintain a strong business credit profile
- Daily or weekly debits, as opposed to a monthly debit, reduces the size of each periodic payment making it easier for many borrowers to smooth their cash flow and avoid contributing to “lumpiness” in having large expenses due at the end of the month. Financial consulting firm Oliver Wyman suggests, “…the use of daily remittance model helps smooth the cash flow impact of the new loan for the [small business]; after all, monthly remittance introduces yet another source of cashflow ‘lumpiness.”
- This type of electronic direct debit makes capital available to some borrowers who might not qualify within a more traditional payment model
Making ACH Business Loan Payments Work for Your Business
Millions of ACH transactions happen every day, but that doesn’t mean much if you can’t make it work for your business. With that in mind, here are three things that will help you do just that:
- Make sure you have the right kind of cash flow to accommodate the periodic payment frequency. If most of your monthly revenue is attributed to a handful of customers that make payments at the end of every month, a daily or weekly ACH pull from your business checking account might not work and may disqualify you from some loan types. This is one reason most online lenders want to see the last three or four months of bank statements. They want to make sure your cash flow will support the debit frequency (daily or weekly).
- Make sure you understand the amount that will be pulled with every periodic payment: A fixed payment will likely be easier to budget for. You’ll also want to determine if payments are only made on weekdays or if they will also take place on the weekends. The more you understand about the process upfront, the better you will be able to budget and prepare for each periodic payment.
- Make sure you understand what happens if you don’t have sufficient funds in your account: Nobody wants this to happen, but if it does, what does that mean for your loan? Making sure there is always enough in the account to make the automatic payment needs to be a priority, but sometimes circumstances might leave a business owner short. Most of the time, you’ll know before the payment is due. If that’s the case, reach out to the lender before the payment is attempted to try to make other arrangements.
Making payments electronically is an innovation designed to make small business loan payments seamless and easy for both the borrower and the lender—and something I think we’ll see even more traditional lenders embrace as time goes on. As a result, it’s important to not only understand how ACH transactions work, but to understand how to make them work for your small business loan.