ACH stands for automatic clearing house and is sometimes called an ACH advance or ACH cash flow loan. It is a popular way to get funding for small businesses and are ideal if you need quick funding. Instead of being based on your credit history, an ACH loan is based on your ability to make revenue repeatedly. However, they do have their own set of drawbacks. Today we will discuss everything you need to know about ACH loans from how they work, their benefits, and some drawbacks to make note of before you apply.
What is an ACH Loan?
An ACH loan is a type of short-term business financing. Lenders look at the number and amount of credit and debit card transactions that your business does every day. If you qualify for the loan, the lender withdraws loan payments straight from your business accounts on a daily or weekly basis.
ACH loan repayments are similar to the automatic payments you set up for your personal credit card or utility bill.
ACH Loan Benefits
If your business needs short-term capital but cannot qualify to borrow from traditional financial institutions, applying for an ACH loan has benefits for you.
- You can qualify easily: ACH loans are easier to qualify for compared to other business financing options. Since the lender has access to your bank account for electronic payments, the risk is low.
- Fast process: One of the biggest benefits is the application and approval process. It typically is very quick and takes a matter of just a few short days. Funds are automatically transferred to your account.
- No Collateral: Unlike traditional lenders, impaired credit will not affect your ability to qualify, 2 years of credit history is not mandatory, and ACH lenders do not require you to put up collateral to secure the loan.
There are also benefits for the lenders as well.
- Fast loan payments
- Account verification
- There are records of payments made
- Lower processing fees than with a check or credit card
ACH Loan Drawbacks
Although there are a few benefits to ACH loans, they have their drawbacks as well.
- Expensive to Borrow: The interest rates for ACH loans depend on the lender, but they can go up as high as 20%. On top of the high rates, there may be additional fees such as origination fees, prepayment penalties, and other costs. So if you are looking for a large amount of capital, this will not be a good option.
- Low Loan Amounts: Compared to other financing options, you may be offered a low loan amount.
- Payback Time is Tight: Expect a term of 3-6 months.
- No Business Credit: ACH lenders do not report to the business credit bureaus so your payment history will not help you establish your credit.
ACH Loan Requirements
There is little paperwork needed when applying for an ACH loan compared to other loans. The following are some of the few items you need to have on hand when applying.
- Your business must be in business for at least 3 months or more
- You must own at least 51% of the business and prove you have no bankruptcies
- You need at least $12,000 in monthly income to qualify
- You need to show you have made an average of 6 bank deposits each month for the past 3 months
- You need clear copies of identification for all business owners
- You need a voided check for the business bank account that is to be funded
There may be additional paperwork required depending on the lender but having these on hand is a good start.
Before You Apply for an ACH Loan
Before you apply for an ACH loan you should consider taking the following the steps.
- Compare options: ACH loans are not the only way to get funding for your business. Check out alternative options that are more affordable if possible.
- Understand the repayment terms: It is important to understand how the payment procession on an ACH loan is structured upfront.
- Look at your budget: Are you able to handle the repayment schedule on top of your existing expenses? If not, you may not want to apply for financing.
The Bottom Line
Applying for financing is a big deal but before you do, make sure to identify the needs of your business. Having a plan about what you are going to do with the loan and how you are going to pay it back is essential. Also, make sure to find out what is needed to qualify and apply.