An ACH loan is a type of merchant cash advance that has been gaining popularity as a way to finance small businesses. Companies will compare ACH loans against other financing products like factoring and purchase order financing to determine which one will be the best to solve their problems.
Read on to learn about both ACH and invoice factoring and by the end you should have a better idea of what type of product is better tailored to your needs.
An ACH loan is a term to describe a specific type of Merchant Cash Advance in which the lender finances your future sales. The lender reviews your financial statements and bank deposit track record to determine the amount they can offer. The lender deposits the funds into your bank account once the loan package is underwritten.
The lender makes periodic withdrawals from your bank account to pay back the loan. The lender makes these withdrawals daily, weekly, or monthly until the advance is fully repaid. They are called ACH loans because deposits and withdrawals are made through the ACH system. ACH deposits are also commonly known as “direct deposits”.
Invoice factoring helps companies that have cash flow issues due to customers that are slow paying. Clients pay their invoices in 30 to 60 days which can cause cash flow problems.
The finance company reviews the credit quality of your commercial invoices and provides an advance for invoices that qualify. This advance provides the funds to operate your company and secure new business. Each invoice financing transaction settles as your clients start paying their invoices on their usual schedules.
Invoice factoring can be used on an ongoing basis to improve your cash flow.
ACH loans have a number of advantages, especially for small companies. Here are the three most important advantages.
There are a number of advantages that come with factoring. Here are the most common advantages.
ACH loans have some disadvantages as well.
Here are some disadvantages of invoice factoring.
The better solution depends on your type of business, your current situation, and your future needs. Factoring helps you if you have good clients, growing sales, and need funds to operate the business. An ACH loan is a better option if you have minor cash flow problems, run a stable business, or need funds to buy equipment.