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January 18, 2022

How Do ACH Business Loans Work?

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Fora Financial

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If you need funding but can’t qualify for a traditional small business loan because of your credit or time in business, an ACH loan may be a good option. In the sections below, we'll explain what ACH business loans are and how they work.

What Is an ACH Loan? 

Also known as an ACH advance or ACH cash flow loan, an ACH loan is a short-term financing solution. While most lenders focus on your credit, those who offer ACH loans consider the average daily balance of your business checking account. Upon approval, a lender will withdraw loan payment directly from your account. Therefore, an ACH loan is technically an advance rather than a loan.

Pros of ACH Loans

ACH loans offer a number of noteworthy benefits to business owners including:
    • Lenient Qualification Criteria: Compared to other financing options, ACH loans are easier to qualify for. This is because the lender has direct access to your bank account and is therefore taking on less risk.
    • Fast Funding: If you need money right away, an ACH loan can be a great choice. It offers fast funding, oftentimes via direct deposit, hours or days after your application has been approved.
    • No Collateral Needed: Some loans require you to secure your loan with collateral such as equipment or your commercial property. If you default on your payments, the lender has the right to seize your collateral. In most cases, ACH loans don’t involve collateral.
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Cons of ACH Loans

As with all types of financial products, ACH loans also come with drawbacks such as:
  • High-Cost: While ACH loans are convenient and easy to obtain, they’re not cheap. In fact, APRs are often in the triple digits. In addition to a sky-high APR, you might be on the hook for origination fees, prepayment penalties, and other fees that increase the overall cost of your loan.
  • Lower Loan Amounts: If you need to borrow a lot of money, you may not be able to receive all it through an ACH loan. ACH loans are known to offer lower loan amounts than other, more traditional forms of working capital.
  • Cash Flow Issues: Since a lender can go into your business bank account directly to process electronic payments, it’s your job to keep an eye on your cash flow. An ACH loan can make it a challenge to budget for automatic withdrawals or save money.
  • No Chance to Build Credit: If you’d like to build or improve your business credit score, you won’t be able to with an ACH loan. This is because lenders who offer these products won’t report your payments to the major credit bureaus.

How to Apply for an ACH Business Loan

If you’re interested in an ACH business loan, do some research and shop around. You’ll find that most ACH business loans are offered by online lenders. Once you find a few options that pique your interest, compare them. Explore the rates and terms of each one. Then, choose the best deal and fill out the application. When you do so, be prepared to provide three to six months of business bank account statements. You might also have to supply other documents, such as a copy of your driver’s license and a voided check. Before you sign on the dotted line, review your loan agreement and ACH authorization form closely. If you have any questions or something is unclear, don’t hesitate to reach out to your lender. Last but not least, make sure you have enough money in your business bank account for the lender to process the first payment.

ACH Financing vs. Merchant Cash Advance

A traditional merchant cash advance (MCA) is when a lender will deduct a percentage of your credit and debit card sales on a daily or weekly basis. Your payments will change based on your business income so you can avoid cash flow issues when sales are slow. ACH loans are essentially a type of merchant cash advance (MCA). The different between them and traditional MCAs, however, is that they’re based on total projected business revenue instead of just credit and debit card transactions. Both ACH financing and MCAs offer an easy application process and fast funding.

Conclusion: Set Your Business Up for Success with an ACH Business Loan

When you need access to capital for your small business, there is no shortage of financing options at your disposal. An ACH loan may be a viable option if you’re a new business owner or don't have a strong credit score. Before you commit to one, however, consider alternative options. You might be able to find another, more affordable financing solution.