Business Loans

A Guide to Understanding ACH Loans

Jun 29, 2019 • 9 min read
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      An ACH loan, sometimes called an ACH advance or ACH cash flow loan, is an increasingly popular way to boost your small business funding without going through a prolonged loan process. The amounts are usually smaller and the payback term is shorter, but these loans can be ideal if you need a quick hit of funding to get through a cash crunch or for an expansion.

      These loans are not based solely on credit history but on your ability to make business revenue on a repeated basis. These lenders leverage access to your business bank account–these loans essentially function as an advance in exchange for a portion of your future sales.

      What is an ACH Loan?

      ACH loans are based on the amount of business transactions your company conducts on a repeated basis. Lenders look specifically at the number and amount of credit and debit card transactions your business does every day.

      The ACH stands for Automated Clearing House, the method used to withdraw small loan repayments from your company’s bank account on fixed, agreed-upon intervals. These intervals are typically daily or weekly.

      For the lender, it is the repeated access to your bank account that lowers the risk.

      An ACH loan and a Merchant Cash Advance (MCA) could probably be considered siblings. While an MCA loan is really an advance based upon your regular and predictable volume of credit card transactions, an ACH loan should really be considered a “cash flow” loan. Instead of looking at your credit card transactions, the lender looks at the average daily balance of your business checking account.

      The ACH designation really applies to how the lender is paid. ACH refers to the lender’s ability to withdraw an agreed upon amount directly from your checking account at agreed upon intervals. This is different from factoring your accounts receivable, because instead of billing your customers and collecting from them, they directly access your checking account in much the same way automated payments might go to your mortgage lender or a utility company from your personal checking account.

      In many ways, ACH Loan repayments emulate automatic payments you would set up for a credit card or utility bill payment. These types of payments often use the Automated Clearing House method, too.This type of loan was originally formulated for businesses that do many credit or debit card transactions daily–primarily restaurants or retail operations. Now, though, this loan is commonly offered to pretty much any company, even businesses that aren’t consumer-facing. If this is the case, lenders will typically look at your bank deposit activity instead of your credit card transaction activity.

      Why Would You Want a Loan that Doesn’t Require a Credit Check?

      One of the most popular aspects of ACH Loans is that lenders do not require a hard credit check. There are many reasons why you might not want lenders to do credit checks, even just because a hard pull on your credit can lower your score.

      Generally, a traditional bank lender is going to want you to have a near-perfect FICO credit score, especially if you are seeking a large sum. If your credit score is suboptimal, you may want to look into ACH Loans or other options that don’t require hard credit checks before considering a bank loan.

      Because an ACH lender will be able to pull your payment directly from your checking account, it reduces risk to the lender making it possible for small business owners with a healthy checking account but less-than-perfect credit to get a loan.

      Even if you have excellent credit, you may look into ACH Loans because they are typically smaller and have quicker repayment periods. Again, it’s possible you might want to avoid going to a major lender so you don’t risk the damage of a hard credit check to your good score.

      The Benefits of ACH Loans

      ACH Loans are popular because they are a relatively fast way to raise a decent amount of capital, funding that can be used to renovate a storefront or hire seasonal help.

      The automated and fixed nature of ACH Loans is preferred by many, too, because you don’t have to worry about logging into an account every month and paying varying amounts.

      This automation doesn’t mean that the agreement is set in stone–if business increases, you can pay off your loan faster. If business slows, you can typically extend your repayment period for a fee.

      ACH Loans are a solid option if your FICO credit score is less than ideal but you can show a consistent, repeated number of transactions into your business bank account.

      A Note About Interest Rates

      Because they don’t require a FICO credit check, the interest rates on an ACH Loan are not usually as good as what you can find with a standard bank loan. The rates will often be higher, although not astronomical.

      This option is probably not good if you are seeking a large influx of capital to fund major expansions. Because they require less documentation, ACH Loans are often much smaller than loans that require FICO credit checks.

      The typical amount of funding you can expect from an ACH Loan is about $10,000. It is likely that you will not qualify for any amount more than double your business’ monthly revenue.

      Payback time is tight, too–expect a term of 3-6 months.

      What’s Required to Get an ACH Loan?

      Your Business Must Have Opened Already

      You won’t receive an ACH Loan as seed capital–you need to prove that you are already in business. Many lenders will require you to have been in business for 3 months or more.

      Majority Owner Needs to Be Bankruptcy-Free

      The person applying for the loan must prove they are the majority owner, so you must show that you own at least 51% of the business. You will also have to prove that you have no open bankruptcies on your record.

      There Is a Monthly Revenue Minimum

      In making their decision, ACH Loan lenders look at your sales. It is common to need at least $12,000 in monthly income to qualify. The amount of the loan is chiefly based on this monthly income–the lender will decide whether you are making enough money to stay in business and pay back the loan on a repeated basis. Again, you shouldn’t expect a loan to be any more than double your monthly income at the very maximum.

      You Have to Make Bank Deposits Several Times per Month

      You can apply for ACH Loans based on your bank account deposits, but you have to show that you have made an average of 6 bank deposits per month for the previous 3 months.

      Applying for an ACH Loan

      The process of applying for an ACH Loan is relatively easy compared to a traditional bank loan. This contrast is because ACH Loan repayment is structured differently–the lender agrees to buy a portion of your future cash inflow upfront.

      You will have to agree to a purchase amount and sign a contract. For a variety of legal and accounting reasons, ACH Loan lenders will need your social security number. Although there will not be a hard pull for your FICO credit score, ACH Loan lenders often do a soft pull that will not damage your score. Unlike with standard bank loans, though, your credit score matters less than your transaction history.

      Once the contract is approved, your repayment begins. The lender will automatically deduct an agreed-upon amount from your bank account on a daily or weekly basis through ACH.

      Before you sign on the dotted line with anyone:

      • Make sure you understand all the fees and terms upfront: Don’t assume they are all the same, you’ll want to make sure you know each and every fee you’re going to pay. You don’t want any surprises. If  you’re working with someone who is unwilling or can’t speak specifically to what your fees will be, find another company to work with. Don’t settle for a bad deal. There are reputable ACH lenders who will gladly explain all their fees and terms to you.
      • Make sure you have an estimate of the annual percentage rate (APR): This is one way you can compare costs in an apples to apples fashion. Because every ACH company is different, it can make it problematic to make comparisons.

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      About the author
      Barry Eitel

      Barry Eitel has written about business and technology for eight years, including working as a staff writer for Intuit's Small Business Center and as the Business Editor for the Piedmont Post, a weekly newspaper covering the city of Piedmont, California.

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