ACH Payments, Debits, and Transfers: The Ultimate ACH Guide | Nav

ACH Payments, Debits, and Transfers: The Ultimate ACH Guide | Nav

ACH Payments, Debits, and Transfers: The Ultimate ACH Guide | Nav

No matter what we try to do to combat it, life seems to get busier and busier with each passing year. This is especially true for small business owners leading growing companies. Automating business processes and merchant services can help simplify things immensely for overworked entrepreneurs. One of the easiest things a business can automate is the payment and billing process. Automated Clearing House or ACH payments are a convenient and easy way to do this. 

What Is an ACH Payment? 

ACH payments are electronic payments that pull funds directly from your checking account. Instead of writing a paper check, exchanging cash, or using a debit or credit card, the money moves from your account to the merchant’s account automatically—with your prior approval. Two institutions, the RDFI (Receiving Depository Financial Institution) and the ODFI (Originating Depository Financial Institution) help enable ACH processing, often involving banks and the Federal Reserve.

You can set up automatic ACH payments that happen on a recurring basis. This is ideal for monthly bills that don’t vary widely between billing periods, like telephone service, software subscriptions, and landscape maintenance. 

With automatic ACH transactions, the biller initiates the charge and seamlessly in the background the money is withdrawn automatically from your account. This not only saves you time when it comes to bill paying, but it cuts down on clutter from paper bills, ensures your bills are paid punctually, and may even help improve  your business credit profile as you make timely periodic payments.

Even with the best intentions, making the time to sit down and manually pay bills can be difficult to do. It’s easy to put off this task in the hustle and bustle of running a business, so it can sometimes get overlooked by harried business owners, resulting in late charges, loss of service, and a ding on your business credit profile. 

Many lenders today require periodic payments to be made this way, so you should expect that as you apply for financing.

If automatic payments are not your thing, you can also set up the ability for ACH payments by authorizing a link between your biller and your bank account. You can then go online and transfer funds as necessary, paying bills with the click of a button. Though this adds a step to your to-do list, it can give entrepreneurs a feeling of security and control over their accounts. 

How ACH Payments Work

ACH transactions are enabled by something called the Automated Clearing House Network. The ACH Network is an electronic network that links financial institutions across the United States. It processes payments and enables bank transfers, moving money from one bank account to another. Each day, a financial institution accumulates ACH transfers, made up of direct deposit and direct payment transactions. They then process these transactions in bulk regularly via the ACH Network.

ACH Network transfers can include payments to and from consumers, businesses, and government entities. Annually, the ACH Network processes trillions of dollars of payments. Because it does not rely on moving paper like traditional check payments, the ACH Network’s electronic processing time is much faster, enabling businesses and consumers to save time, money, and other resources.

To make payments via the ACH Network, you need to first authorize your biller to pull funds from your account. This is usually done using an electronic or paper form or can even be done over the telephone. In addition to providing permission to the biller, you’ll need to provide banking information, including the bank account number and routing number for your checking account. Once the biller sets up a link to your account, ACH payments can begin.

Though issues are rare, any fraud or error made via the ACH Network is reversible. Consumers are protected by federal law as long as problems related to their personal accounts are reported to their financial institution within 60 days. Business accounts are protected as well, though not as intensely. 

NACHA (National Automated Clearing House Association) is the governing body of the ACH Network. The NACHA Operating Rules ensure the roles and responsibilities of all organizations participating in ACH transactions are clearly understood. These guidelines safeguard the ACH direct debit process and keep the Network moving smoothly to support businesses across the U.S. economy.

Differences Between ACH Payments, Wire Transfers, EDIs, and EFTs

Sometimes, there can be confusion surrounding the differences between ACH payments, wire transfers, electronic data interchanges (EDIs) and electronic fund transfers (EFTs), as they have different functionalities.

Wire transfers are used to immediately transfer funds from one bank account to another. As with ACH payments, a bank account and routing number are required. Wire transfers can happen internationally, while the ACH Network only exists within the United States. Funds exchanged via wire transfer change hands immediately. This can be a benefit in some situations and a drawback in others, as in cases of fraud, because it is very difficult to get electronically transferred funds back once they have arrived in another account. Wire transfers also require processing fees, which can be steep depending on the amount of money being exchanged. International exchanges involve even higher charges. ACH payments, on the other hand, have comparatively minimal processing costs.

EFT refers to all types of electronic payment methods. ACH transactions are a type of EFT, along with wire transfers, payroll direct deposit, credit card payments, debit payments, echeck payments, online payments, and mobile payment transfers. EFTs also comprise PIN transactions, like withdrawing money from an ATM or using a debit card at the gas station. EFT enables businesses to send bills electronically, enhancing efficiency and reducing paper waste. EFT payments also fuel the popularity of online shopping. In the future, EFT payment options may make cash and paper checks unnecessary.

In contrast to what we’ve discussed above, EDI is a data exchange format rather than a payment method. It’s used to process high-security information like invoices and purchase orders, and it’s recognized for its speed and convenience. For more details when choosing between EDI vs. ACH, head here.

Pros of ACH Payment Processing

The ability to participate in ACH transactions comes with many advantages for small businesses. 

  • Convenience: Bill pay via ACH transfers is efficient and can help streamline your processes. Recurring payments happen without you having to do anything after the initial setup. The inverse can also be true if you’re the vendor, as ACH can give you the ability to accept payments online.
  • Less hassle: Remembering what bill is due when is a mental load you don’t need to carry. There are much more important things that deserve your intellectual attention, like self-care and developing business growth strategies. 
  • Less time: Though sitting down, writing a check, and putting it in the mail might not seem to take a lot of time, when you add it up for each bill you pay per month, it’s a good chunk. With ACH debit, that time can be used on other activities. 
  • Cost-savings: The pricing for a stamp may be less than a dollar, but when you consider how much you spend a year on mailing bills, it can be a significant amount. It might not be a sum that makes or breaks your business, but ACH can save you on postage money and man-hours if you’re paying someone else to handle your bills.
  • No third parties: ACH transfers go directly from your bank account into that of your biller. You don’t need to worry about the Postal Service losing your envelope or the payment being delayed in the mail for whatever reason. You can also eliminate the potential of human error in processing the payment once it’s received. 
  • Easier to organize: For many, maintaining a check register is a tedious annoyance. In addition to that, payments often need to be manually entered in whatever financial tracking system your company uses to monitor expenses. A direct payment made via automated clearing house will be listed on your monthly bank statements. Many types of financial software can be populated automatically from online statements, keeping you organized with little work on your end.
  • Environmentally friendly: Paperless bill payment saves countless trees – Not only by eliminating paper billing statements, but paper checks as well. Additionally, deducting the physical transportation of these bills via the Postal Service saves fuel, reducing carbon footprint. 

Cons of ACH Payment Processing

  • Less control: By paying bills electronically via an automated system, it can feel like you are giving up an element of control. Some entrepreneurs have a difficult time handing over tasks like this and prefer to manually review every dollar spent by the company, especially when finances are tight. 
  • Less privacy: Setting up ACH payments involves sharing your banking details, including your account number. In the wrong hands, this could lead to financial misfortune for a business. Fraud rarely occurs in ACH payments however, but it is always a possibility. 
  • Less attention to detail: When you’re not forced to review each payment manually, you may miss any charges you wish to dispute, like increased fees. 
  • Potential for mistakes: With automated payments, you may fail to notice billing errors if you’re not examining your financial statements with an eagle eye. Large mistakes might result in big problems, like an overdrawn account and the repercussions that come with that. 
  • Potential for overdraw: Since ACH payments happen automatically, you might accidentally find yourself with insufficient funds in your account, either because you’re not watching the balance, as paying bills is not on your mental radar, or because you forgot to transfer money from your savings accounts into your personal or business checking account. . 
  • Overpaying: When you don’t look at physical bills each month, you may forget what you’re paying for. That means you might be paying charges for services you’re no longer using. For example, maybe you forgot to cancel that email management service after the trial period ended. Or, perhaps you’re paying a membership fee for an organization that’s become irrelevant to your business. 

How To Accept ACH Payments Via the ACH Payment Network

If you think accepting ACH billing could be beneficial for your company, the first step to getting set up is to find an ACH processor. A financial institution such as a credit card processor, merchant account provider, bank, credit union, or accounting software provider might be a good place to start, especially if you already have a business relationship with one of these entities. ACH processing is likely a service you can add on to your existing business package, though it may require a separate underwriting process. 

Your ACH provider will supply you with a system to process billing and collect necessary information depending on your business type. This includes gathering customer names, banking details, along with the necessary approvals. Additionally, this system will verify customer account information, usually by making a small deposit or charge to confirm the account is legit.  

In most cases, the simplest way to collect customer information for ACH billing is via a link on your website that directs customers to an online form acting as payment gateway to your ACH provider. Your provider can also offer a virtual terminal so that an individual in your billing department can manually enter customer account details via their work computer. This is usually preferred by businesses that handle most customer interaction via phone or mail order forms. Finally, ACH processors can provide businesses with a check scanner. By obtaining a voided paper check from a customer, companies can use the scanner to collect the customer’s account details, which will be automatically added into their ACH processing system. 

Once you’re set up for ACH payments, you can start getting paid! ACH transactions are batch processed three times per day by banks. In most situations, it will take 3-5 business days to see the ACH credit in your account. It is possible to do same-day transactions (e.g., you receive the money on the same day you bill the customer), but there is usually an expedition fee involved. 

How Much Does ACH Processing Cost? 

The ability to accept payments via ACH does come with some expense. Most of these are variable, depending on the provider you choose. Some ACH processors will charge a flat fee per transaction. Typically, these fees will be between $0.20 and $1.50. Other processors charge a percentage per transaction, usually from between 0.5% and 1.5%. For businesses doing a lot of business via ACH, flat fees tend to be the more affordable option. If you are using a business for other services (like credit card processing), you may be able to negotiate lower ACH costs when you add the service offering. Some providers may also offer free ACH processing as an incentive for signing up for other services. 

In addition to transaction fees, there are further costs associated with ACH. Often, there are one-time setup fees, equipment/subscription fees, return fees, monthly minimum fees, and high-ticket surcharges. Make sure you talk with your processor to ensure you understand all potential charges. Though it’s often easiest to employ a processor with whom you already do business, it can be smart to shop around for the deal that makes most sense for your individual business needs. 

Final Word: ACH Payments for Your Business 

The ACH Network operates behind-the-scenes, electronically supporting a huge portion of financial transactions across the U.S. economy. ACH bill-pay enables convenience for consumers and merchants. Though there can be drawbacks to paying bills in an automated fashion (namely, a loss of control and increased probability of missing any mistakes), the process is ultimately beneficial for busy business owners whose time is at a premium. Additionally, enabling recurring billing via ACH is advantageous for most businesses. For a nominal fee, ACH billing empowers a simplified automated billing process that ensures customers pay you promptly. It also supports the forecasting process, allowing more accurate projections and informed decision-making across the company. 

Importantly, automated billing and payment can help improve your business credit score so you can access new and different types of financing to sustain your company’s growth. Check your business credit report now by accessing your free business credit scores.

This article was originally written on February 27, 2020 and updated on July 29, 2022.

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