What Is an ACH Loan?

Small business owner processing shipments with laptop
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DEFINITION
An automated clearing house (ACH) loan is a relatively small short-term loan that requires no collateral or business credit, and allows a lender to withdraw payments directly from the borrower's business bank account.

An automated clearing house (ACH) loan is a relatively small short-term loan that requires no collateral or business credit, and allows a lender to withdraw payments directly from your business bank account.

ACH loans have their share of pros and cons. Under the right circumstances, these loans can help keep your business afloat—but they can also undermine your business finances. Find out whether ACH loans are right for your business, or whether they’re likely to cause more problems than they solve.

Definition and Examples of ACH Loans

The automated clearing house (ACH) is a network of thousands of U.S. banks that processes transactions. The ACH makes it easy to transfer money electronically from one bank account to another in seconds. An ACH loan makes use of this transfer system to allow a lender to withdraw payments for a business loan directly from your business bank account.

  • Alternate name: ACH advance, ACH cash flow loan

ACH loans are generally made to small businesses that are having a hard time managing cash flow. They are made on the basis of your business bank account rather than business credit or collateral, which can make them easier to access than typical business loans.

The concept behind an ACH loan is that it is, in essence, an advance on future revenue. For example, a boutique may need to expend a good deal of money to buy products wholesale from a supplier. Meanwhile, because it has no product to sell, the boutique may have a hard time making payroll. An ACH loan makes it possible to bridge the period of time between purchasing and selling products.

How ACH Loans Work

ACH loans are offered as quick and easy tools for businesses that need money fast. They generally don’t require collateral or established business credit, are easy to apply for, and pay out fairly quickly (within a few business days). However, traditional lenders that do provide ACH loans may charge very high interest rates.

Unlike traditional loans, ACH loans are made on the basis of assets you will acquire rather than on assets you have. Therefore, in theory, you should be able to take out a small, short-term ACH loan today and pay it off within a few weeks or months—thereby avoiding major interest payments while also avoiding cash shortfall while you wait for profits to accrue.

An ACH loan essentially ensures the lender gets paid—even at the expense of your business capital. To make an ACH loan work, you need to know you will have cash in hand within a given period of time. This can make an ACH loan considerably less flexible than other financing resources such as business credit cards.

Applying for an ACH Loan

When you apply for an ACH loan, the lender typically will ask for your:

  • Business license
  • Driver’s license
  • Social Security number
  • Business bank account number
  • Voided check

The lender will carefully review your bank account and information to ascertain that:

  • You have about $12,000 or more in your bank account most of the time.
  • You make a certain number of deposits per month (typically six or more).
  • You own the majority of your business.
  • You are not in a state of bankruptcy.

A typical ACH loan is about $10,000—enough to potentially tide a small business over for a short period of time.

Paying Off Your ACH Loan

ACH lenders will have you sign an agreement that allows them to deduct a particular amount of money from your bank account either daily or weekly. These “micropayments” will continue until your full loan is paid off with interest. You may or may not have the option to pay off your loan sooner if you have more available cash.

Pros and Cons of ACH Loans

Pros
  • ACH loans offer quick access to cash

  • ACH loans require no collateral

  • You can get an ACH loan even if you have poor business credit

Cons
  • ACH loans usually require high interest payments (up to 20%)

  • ACH loans usually require quick payback (in about three to six months)

  • ACH loans offer little or no flexibility in payment terms

  • Paying off an ACH loan on time does not improve your business credit

There are some strong pros and cons to ACH loans. In terms of the pros, the approval process typically goes quickly, collateral isn’t necessary, and the qualifications and credit score requirements tend to be more lenient.

However, ACH loans may not be the best option for business owners who need a short-term financial bridge as there is a lack of flexibility with payment, the interest rates are higher, and you may not be able to establish business credit because many ACH lenders don’t report to business credit bureaus. In addition, because lenders have been given ACH authorization, they can directly access your business bank account for payments, which can create challenges with cash flow and budgeting.

Key Takeaways

  • Automated clearing house (ACH) loans allow lenders to use the ACH system to directly withdraw payments from your business bank account.
  • Lenders are essentially advancing your business money based on your expected profits.
  • ACH loans are typically used to cover a business’s short-term cash needs.
  • ACH loans are easy to get because they require no collateral or business credit, and there is typically a quick approval process.
  • ACH lenders tend to charge very high interest rates and require payback within a shorter period of time.

Article Sources

  1. Crestmont Capital. “What Is an ACH Loan and How Do They Affect Small Businesses?” Accessed Jan. 28, 2022.

  2. Lendio. “A Guide to Understanding ACH Loans.” Accessed Jan. 28, 2022.