January 18, 2022
How Do ACH Business Loans Work?
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.
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.