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 or Automated Clearing House, refers to the lenders 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 you mortgage lender or a utility company from your personal checking account.
An ACH loan, much like factoring or an MCA loan, should be considered a short-term financing option. The cost of the capital is more expensive, in other words you’ll pay a higher interest rate, but you’ll be able to access that capital much quicker than a traditional term loan from the bank or other financial institution.
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.
The best place to look for ACH lenders is online. A quick search of ACH business loans just revealed 322,000 hits for me. So there are a lot of these lenders out there—and, some are better than others. Don’t stop and decide to work with the first company that shows interest in your situation. There are also ACH lenders we work with at Lendio.
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.
Like many alternative funding vehicles, an ACH loan should be considered part of a portfolio of loan options that small business owners can turn to depending on the type of financing need they’re facing.