ACH Loan: what they are and how they work

What Is An ACH Loan?

Also known as a business cash advance, an ACH loan—or automated clearing house loan—is a type of short-term business financing. Compared to other types of loans, ACH loans are easier to qualify for, because the lender can access your bank account directly for electronic repayments. A business cash advance gives you an advance on your future sales based on your last three to six months of total sales revenue and outgoing expenses. You’ll then pay back a fixed percentage of predicted revenue over 6, 12, or 18 months.

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.

How Does An ACH Business Loan Work?

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 in 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.

The Benefits of ACH Loans

1. Fast Funding Times

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.

2. Automated Payments

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.

3. Lower Credit Score Requirements

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. Additionally, most financiers do not require a hard credit check.

How to Use The ACH Loan Calculator

Estimate Your Payments
Estimate How Much You May Qualify For
Terms and Explanation
How to Calculate Payments

Estimate Your Payments

To make the best use of this ACH loan calculator, you’ll need a few additional pieces of information. The calculator requires the following:

• Amount seeking
• Loan term

You will get the estimated daily payment, weekly payment, and total payment.

Estimate How Much You May Qualify For

You can also estimate how much you may qualify for if you take out an ACH loan. Once you fill out your information, the calculator will give you a range of dollar figures within which you may be able to borrow. This will give you an idea of the types of expenses you may cover and whether or not you might need to seek additional financing elsewhere. The inputs for this calculator include:

Business Start Date

This is the month and year your business officially started operations.

Annual Revenue

This refers to the total amount of money your business makes during a 12-month period.

Last Month’s Deposits

Last month’s deposits show how much money you deposited into your business bank account in the previous month.

Estimated Credit Score

This is where you select your business’ estimated credit score.

Terms and Explanation

Here are the essential pieces of information you’ll need to enter and notice as outputs on our ACH loan calculator.

Amount Seeking

This refers to the amount you’d like to borrow. In most cases, your business revenue will dictate how much you’ll receive.

Loan Term

Loan term is how long you’ll take to repay your loan. Since ACH loans are short-term loans, this may be anywhere from a month to a year or so.

Estimated Daily Repayment

Some lenders will automatically withdraw funds from your bank account on a daily basis until your loan has been paid off.

Estimated Weekly Repayment

Lenders may also automatically withdraw funds from your bank account every week until you repay your loan.

Total Repayment

Total repayment refers to the total amount you’ll pay for your ACH loan, including principal and interest.

How to Calculate Payments for ACH Loans

ACH loans provide quick access to capital, and, even if you don’t have stellar credit, they may still be able to provide you with the funding you need. Like other forms of financing, ACH loan payments are determined based on the loan amount, interest rate, term, and any other fees.

1. ACH Loan Repayment Schedule

As indicated in their name, ACH loans withdraw payments via ACH—or directly from your business bank account—on a daily or weekly basis. You’ll agree on the payment amount and intervals with the lender in advance, so there won’t be any surprises. Since lenders can easily access your account and collect repayments, ACH loans are a breeze to qualify for, even if you have fair credit or bad credit.

2. ACH Loan Interest Rates and Terms

ACH loans offer lightning-fast access to cash and are therefore designed for faster repayment, too. That being said, it’s misleading to look at ACH loans with a traditional APR because they’re not designed to be repaid over a years-long process. Instead, it makes more sense to calculate based on a daily or weekly payment. Typical loan terms for ACH loans range from one to 14 months.

3. Consider Potential Fees

At Lendio, we don’t charge an application fee for access to our network of 75+ lenders, but many other lenders do. If you’re shopping around, inquire about potential application fees before you apply.

You will also want to consider any potential origination fees, charges many lenders include upfront to cover the cost of funding a loan. Keep origination fees in mind to account for the total cost of the loan.