For your business to be successful, you’ll need the ability to send and receive money quickly. The automated clearing house (ACH) network enables you to make electronic transfers in the form of an ACH credit or its counterpart, the ACH debit.
This means that whether you want to run payroll or pay bills, you can rely on the electronic funds transfer system represented by the ACH network. Don’t let the terminology throw you; the process is actually quite simple. Today, we’ll help you understand more about how ACH credits work and how they benefit your business.
What is the automated clearing house network?
The automated clearing house (ACH) network finds its roots in 1974, when it was founded by the National Automated Clearing House Association (NACHA). The concept is simple: The ACH network acts as a kind of hub, enabling the transfer of funds between businesses and financial institutions.
In other words, just about any time your company makes an electronic transfer, you’re relying on the digital infrastructure laid by the ACH network. ACH transactions can be conducted through your bank, but many third-party transfer providers such as PayPal, Zelle, and Venmo rely on the ACH network too.
Every ACH transfer will fall into one of two categories: ACH credit and ACH debit. If you look at your monthly bank statement, you might see terms such as “pending ACH credit” appear, providing a record of any electronic payments you’ve made or received during that month.
How does ACH credit work?
Simply put, an ACH credit refers to money coming to you, while an ACH debit refers to money being deducted from your bank account.
Sometimes an ACH credit is referred to as a “push” transaction, since funds are being “pushed,” so to speak, from the sender’s bank account to the recipient’s bank account. The reason you might see the word “pending” on your bank statement is that ACH credits typically take 1 to 2 business days to process.
ACH credit transactions are always initiated by the one making the payment, never the recipient. For example, if you send an invoice to a client, they would have to initiate payment through the ACH system to move funds between bank accounts.
How does ACH debit work?
By contrast, ACH debit transactions are initiated by the payee. To initiate an ACH debit, you would submit a request for payment to the ACH network. As long as you provide the account information for both bank accounts, the ACH system will handle the rest.
ACH debits can be particularly helpful for making recurring payments, such as mortgage bills or your monthly utility bill. After providing your account information, you grant permission for that company to remove money from your bank account.
As with an ACH credit, there is typically a processing delay of at least one business day and as many as five days before funds become available.
Common types of ACH transactions
Now that we’ve covered the basics, it might help to consider the most common types of ACH transfers used in the business world.
Direct deposits easily represent the most common type of ACH transaction. Employees receive direct deposit in the form of an ACH credit, while employers will make direct deposits in the form of an ACH debit.
These direct payments aren’t limited to just your regular paycheck. Many other forms of payment are made through an ACH credit, including:
- Tax refunds
- Social Security
- Other government benefits
In every instance, the benefit of an ACH credit is found in its speed and convenience, as funds are directly transferred to your account without you having to lift a finger.
Make direct payments
For one-time payments to vendors or contractors, an ACH transfer can prove to be ideal. Unlike credit card payments, an ACH transaction avoids high fees and interest rates. Your company can rely on ACH debit transactions to make a direct payment to suppliers, shipping companies, and anyone else that you rely on as part of your business.
Get paid faster
An ACH payment system can help you to increase your revenue stream by offering your customers a safe, reliable way to render payment. It goes without saying that the days of printing and signing paper checks are mostly behind us. Offering a reliable electronic ACH payment system can ensure that your customers are able to easily complete online transactions.
These payment services can help your clients send money the moment they receive an invoice, improving your revenue stream and giving you a better handle on your company’s cash flow.
Earlier we hinted at the way that ACH debits can streamline the way you handle bill payments. If you have a recurring fee, say from a monthly bill, you can use an ACH debit system to set up automatic payments so you never have to worry about deadlines or cutting paper checks.
Some small business owners may even want to set up multiple business banking accounts and use each account for a different purpose. In other words, you could use one bank account for expenses and another for income, which may be a better strategy for monitoring your overall cash flow.
Electronic payments can also be used to pay your annual taxes. To pay your federal taxes, you can log onto the IRS Direct Pay website and submit your financial data. In doing so, you’ll be authorizing an ACH debit from your account in the amount specified.
You can pay state taxes in much the same way, though every state’s website and procedures will look slightly different. In each case, however, you’ll be setting up an ACH debit in the amount due.
Be aware, however, that if you’re facing a time crunch, an ACH debit can take at least a business day or two before the funds are removed from your account. You should always leave yourself plenty of time to submit a payment.
Accounts Receivable Conversion (ARC)
Of course, some businesses and financial institutions may still issue a standard paper check when they are making a bill payment. The ACH network allows businesses to convert these checks to an electronic form, offering all of the benefits of other forms of ACH transactions and giving quicker access to your business assets and revenue.
Obviously this is not a requirement, but your business can benefit from these conversions, which help to streamline your financial processes and improve efficiency across the board.
How to set up direct deposit
We’ve talked a lot about the convenience of receiving payment directly in your account. But if you’re an employer, you’ll have to go through the process of paying your employees through ACH debits.
When you rely on ACH payments, your payroll process will look something like this:
- You’ll initiate the direct deposit with your bank or financial institution
- Your bank will package all direct deposits and send them in batches to the ACH
- The ACH will distribute payments to each employee’s bank
- The receiving bank will process the deposit as an ACH credit
As with most other forms of ACH credits, it typically takes 1 to 2 business days for ACH transactions to be processed, so employers should factor this into their payroll timelines to ensure their employees receive regular compensation.
Limitations of ACH payments
The ACH network has made it easier than ever before to transfer funds between banks and facilitate B2C and B2B transactions. But there are some limitations and stipulations that you should be aware of, as they can impact the way you rely on ACH credits in the future.
While fees are typically low, there are some banks that charge you to move money out of your account. Basically, it’s a way to incentivize keeping your money right where it is. If you need to move money around, you may find yourself faced with a small fee per transaction.
Of course, other banking providers charge no such fees. At Invoice2go, a Bill.com company, for example, customers can enjoy fee-free banking for small business needs, eliminating the administrative expenses found through other financial institutions.
ACH credits are not instantaneous. While some banks claim to offer same-day delivery, it’s actually more common for a financial institution to take as many as 5 business days to make funds available.
This also means that if you initiate a transaction on a Friday, the bank may not even start working on it until the following Monday (or even later, on if there is a federal holiday).
Caps on amount
Depending on your bank, you may have a cap on the amount of money you can move between financial accounts. In some cases, exceeding this cap may result in having to pay additional fees. In other cases, you may be prohibited from making transfers entirely.
For larger transactions, you may need to look into other forms of electronic transfers.
Limited to domestic transactions
Unfortunately, the ACH network only applies to U.S.-based businesses and cannot be used when you’re paying international business partners or other suppliers. If your company does a lot of business with international merchants, you may have to look into other electronic funds transfer systems.
Finally, ACH transfers don’t provide the same kinds of reward points that many credit card companies do. If you do a lot of travel as part of your business, you may find yourself missing out on these benefits, though there’s no reason your company can’t rely on multiple payment solutions that provide the best of both worlds.
Are ACH transactions right for my business?
When it comes to sheer convenience, it’s hard to overlook the benefits offered by the ACH system. It’s a great way to manage bills and company expenses, pay employees, and receive payment from your customers and clients.
Granted, there are some limitations to this payment method, but many businesses still make ACH payment one of many options for handling their finances, equipping them to navigate the modern business climate with agility and reliability.
Build a better bank account
At Invoice2go, we want to help you build a better business banking solution that fits your unique needs. Our business banking provides fee-free services and a debit card that you can use to manage your funds and get quick access to cash at one of 55,000 fee-free ATMs nationwide.
When you’re ready to explore these innovative solutions, sign up for our 30-day no-obligation trial. You’ll see how our platform has helped countless other businesses and experience how we can help yours too!
Frequently asked questions
With so many payment solutions out there, it’s easy to get confused. Here are some of the most common questions we hear about ACH transactions.
An ACH transfer differs from a wire transfer in two significant ways: speed and cost. ACH transactions typically cost a small fee to process, though it can take as much as 5 business days before funds become available.
Wire transfers, on the other hand, are instantaneous, often providing funds within a few hours at the most. The downside is that wire transfers can cost in the neighborhood of $20 to $30. There can even be a fee to receive these transfers. This means that a wire transfer might be best for larger transactions or transactions in which time is of the essence.
An eCheck is a type of ACH debit. However, ACH debit transactions include all forms of debits within the ACH network. Some people use the two terms interchangeably, but the difference is that eChecks are a subset of ACH debit transactions.
Your ACH routing number is usually right in your checkbook next to your account number, though you may also find the data through your bank’s webpage. This number will be important when setting up regular payments online. Try Invoice2go free