Understanding ACH Payments and Small Business Loans

Small business loan payments, via a direct debit (or ACH payments) from the business’ bank account, are a popular way for many lenders, including online lenders, to take periodic payments. This type of payment makes sense for lenders because it reduces the costs associated with processing a loan payment, and more frequent direct debits (daily or weekly) make it possible for the lender to identify any potential repayment issues early—giving them time to try to help borrowers catch up on any loan payments they may have missed and mitigate larger credit issues down the road.

This type of automatic payment is also good for borrowers because, among other things, it has the potential to help a small business eliminate cash flow lumpiness by making more frequent and smaller debits on a daily or weekly basis as opposed to requiring a large loan payment on a monthly basis—although that is not the only benefit to small business owners. There are other small business owner benefits:

• ACH payments can save businesses money. According to electronicpayments.org, it can save as much as $1.22 per check.
• It’s convenient for the borrower because their loan payments seamlessly take place in the background if they are scheduled and automated.
• By helping the business make regular and timely payments, it can help a business build or improve, their business credit profile.
• This type of electronic debit makes capital available to some borrowers who might not qualify within a more traditional payment model.

What exactly is an electronic debit or credit transfer?

If you’ve ever had a mortgage or auto payment directly pulled from your personal checking account, it’s done through the Automated Clearing House (ACH). The ACH is a network for processing electronic credit and debit transactions in the United States. An ACH debit transfer only happens when you explicitly allow a third party (a vendor, merchant, or a lender) to have direct access to your business checking account. 90 percent of electronic payments are handled via ACH including direct payroll deposits and electronic payments.

Many lenders, including online lenders, now accept business loan payments through an ACH debit transfer. Most of these periodic payment debits are made on a daily, weekly, or monthly basis depending upon the individual lender and the type of financing involved.

Does this type of loan repayment method work for your business?

Everyday there are millions of ACH transactions taking place all across the country, so it’s likely this will become (if it isn’t already) the way your business will repay a small business loan in the future. In order to make an ACH direct debit work for your business, here are some things you can do to make sure it does:

1. Make sure you have the cash flow to accommodate the periodic payment frequency: If most of your cash flow comes at the end of the month, a daily or weekly debit might not be the right solution for your business. It could also disqualify you for lenders that typically require a daily or weekly periodic payment. This is one reason why lenders request to review three or four months of your business bank statements. They want to confirm that you have the type of cash flow that will accommodate the more frequent payment schedule.
2. Make certain you understand the amount that will be pulled from your account every direct payment: Depending upon the lender, it could be a fixed amount, or if it is a Merchant Cash Advance (MCA), it could be an agreed upon percentage of what’s in your merchant account each day. You’ll also want to know if payments will be deducted on weekends and holidays, or will only take place on workdays. The more you understand about the process before the first debit takes place the better.
3. Do you know when the first payment will be due? If you are making monthly payments, it’s not uncommon for the first payment to come due the following month. The same is true for weekly or daily payments. You can expect the first weekly loan payment to be required the following week after you accept the loan terms, and the first daily payment will likely be required the next business day. Don’t assume that first daily debit won’t take place until the following month after your loan proceeds are disbursed. Understanding when your first loan payment is due will help you be prepared rather than surprised when that first automatic debit takes place.
4. Do you know what happens if you don’t have sufficient funds in your account to make the payment? Nobody, including your lender, wants this to happen. Nevertheless, if it does, what does that potentially mean for your loan? Making sure there’s always enough in your account to make the automatic payment needs to be a priority, but sometimes there are circumstances that might make that problematic. Most of the time, you’ll know ahead of time if your are going to come up short, so you should reach out to the lender in advance, before the debit is attempted, to try to make other arrangements. Typically, lenders are willing to work with borrowers that have legitimate challenges and may need to work out a missed payment. It’s seldom a good idea to do nothing and allow the lender to try to pull the debit when there aren’t sufficient funds in your account.

Making payments electronically is an innovation designed to make small business loan payments seamless and easy for both the borrower and the lender. As ACH direct debits become a more popular way for both traditional lenders and online lenders to accept periodic payments, it’s important for business owners to understand what that entails, the opportunities it might provide in terms of additional loan options, and help them position their cash flow needs in such a way to accommodate the often more-frequent-than monthly payment terms.