If you’ve ever found yourself wondering, “what is ACH?” you already know the answer—ACH is the hidden technology that powers many of today’s digital transactions between banks. If you’ve ever sent or received funds through automatic bill pay, it was likely done through ACH.
ACH is accounting terminology for a common type of electronic transaction that happens between bank accounts and their networks. From a business owner’s perspective, ACH is a valuable resource that helps businesses save time, conserve resources, minimize errors, and get paid faster.
What is an ACH Payment?
ACH stands for “Automated Clearing House,” which refers to an electronic network that can process payments in batches. Money moves in bulk between financial institutions and accounts, through this network. This batch-processing model streamlines the process of transferring funds between different banks.
Small business owners use ACH payments for a few reasons:
- Paper reduction
- Easier tracking in account systems
- Eliminates bookkeeping step due to automation
Checks can be time-consuming to manage. With ACH transfers, you can work with larger companies and vendors of all sizes, more easily. You can also pay your own vendors more easily. Rather than issuing and receiving paper checks, you can transfer funds with a few clicks. You can easily set up connections to different companies using your accounting software. Some platforms provide tracking details around when a client has opened an invoice and scheduled a payment for processing.
This transparency improves communication between businesses. Rather than sending back/forth emails or ending up in “where’s my payment?” phone tag, you will have a clear record of your payment status—whether it’s queued up for processing, pending approval, or on its way. ACH processing enables efficiency in cash flow management by giving parties a consistent, predictable, and transparent way to send and receive funds.
Are ACH Payments Different Than Bank Transfers?
In short, it depends on what you mean by “bank transfer.” Generally speaking, a bank transfer refers to the transfer of money directly from one bank account to another. But, bank transfers vary by cost, speed, and requirements depending on the nature of the bank transfer.
- Internal, personal bank transfer: Internal, personal bank transfers refer to a transfer within the same financial institution (internal) between a single person’s accounts (personal). For example, if you use a bank transfer to move funds from your checking account to your savings account at the same bank, that bank transfer is most likely an internal, personal bank transfer. Generally, this type of bank transfer is quick (if not immediate) and free of charge.
- External, personal bank transfer: External, personal bank transfers refer to a transfer between a single person’s accounts (personal) that exist in separate financial institutions (external). If you use a bank transfer to move funds from a checking account at given bank to another checking account at a different bank, the bank transfer is most likely an external, personal bank transfer. The speed and costs associated with external, personal bank transfers are fully dependent on the policies implemented by the banks involved in the bank transfer.
- Wire transfer: A wire transfer is used to send money from one bank account directly to another bank account. While the end result is similar to an ACH transfer, a wire transfer functions differently. Unlike an ACH transfer, a wire transfer is a deposit transaction where the party that wants to pay another party initiates the withdrawal from its own account for deposit into the other party’s account. There is no intermediary (e.g. the Automated Clearing House) in a wire transfer, and wire transfers are one of the quickest bank transfer methods. However, this speed and lack of intermediary comes at a cost. Wire transfer fees vary from institution to institution, and can be dependent on the amount of money being wired.
Bank transfer is a generic term for a variety of transactions that aim to move money from one bank account to another without the use of a check, cash, or other physical instrument.
Why Businesses Accept ACH Payments
ACH Payments Are Efficient
Many business owners use ACH payment processing to manage auto-payments. This can help in avoiding the potential for delays or hiccups. You can also build an integration with your accounting software to keep track of payments and create a paper trail—with minimal manual effort.
If customers are on auto-payment through ACH transfer, there is less month to month people-power involved in the billing and collection process (e.g. no paper invoices, no cutting/depositing checks, no collection calls, etc.).
ACH Payments Are Accurate
If you can automate parts of your billing process, you can greatly increase accuracy through the removal of human error. With no humans crafting invoices, drafting checks, mailing checks, depositing checks, etc., the likelihood of an error decreases.
ACH Payments Are Customer-Friendly
Many billing errors stem from administrative challenges that are easy to avoid or correct due to digitization. ACH transfers are secure and regulated. Traceability creates an element of security, with a trail that is easy to follow. Your customers will appreciate having less leg work to do.
Payment Processing is Faster with ACH
ACH payments often clear in 1-5 days, accounting for weekends and bank holidays. Payment processing often turns out to be faster than managing piles of paper checks. You don’t need to worry about updating your accounting software, taking your check to the bank, and waiting for the deposit to clear.
The Automated Clearing House provides a government-instituted and regulated structure that ensures security and standardization. Finally, ACH transfers are inexpensive (and sometimes free) for customers when compared to wires, checks, and credit card payments. Some companies sign up for ACH services and are able to process ACH transactions in bulk, at a monthly fee.
How Much Do ACH Payments Cost?
There is no one-size-fits-all answer, but in general, ACH transfers cost less than direct wire transfers, which are typically $25/month for domestic transactions and $40/month for international transactions. Businesses will often pay a monthly fee for a certain number of ACH transfers—or, they will take advantage of no-cost options that are available as part of a monthly payment for accounting software.
Some ACH processors will charge a flat per transaction of $0.25 to $0.75 per transaction. Others charge a percentage, ranging from 0.5% to 1% of the transaction’s value.
Getting Started with ACH Payments
ACH transfers with accounting software like QuickBooks automates the entire process and remove fees. If you’re a QuickBooks customer—or you use any other accounting software—think about how ACH payments can help you revamp your processes. Try a one-time payment to see how the experience works and to understand how information flows electronically between your bank account, accounting software, and payment processing system.
Then, figure out how to phase-out paper checks from your business altogether. Talk to your customers to learn what they think of ACH payments. Give yourself six months to a year to transform your payment processing, accounts receivable, and invoice management process.