What are ACH payments? Definition, examples, and how they work

ACH bank transfers are a practical way for businesses to improve how quickly their clients pay up. A major QuickBooks survey reported that 56% of small companies have to wait more than 30 days for customers to pay their invoices. ACH payments settle in just a few days, easing pressure on your cash flow by closing the gap between sending an invoice and getting paid.

Below, learn about the different types of ACH payments, how they work, their benefits, and how to handle them with your accounting software.

Jump to:

• Understanding what ACH payments are
• How ACH payments work
• Types of ACH payments
• What's the difference between ACH payment vs. wire transfers?
• How to accept ACH payments as a business
• What are the benefits of ACH payments?
• How much does ACH payment processing cost?
• How long do ACH transfers take?
• Choose the best payment setup for your business

Understanding what ACH payments are

ACH (Automated Clearing House) electronic payments are bank-to-bank transfers that are processed through the ACH network. They’re a way of moving money between US financial institutions without needing to use paper checks, cash, or card networks.

You can use ACH transactions to:

• Run payroll via direct deposits
• Make vendor and contractor payments
• Collect customer invoice payments (one-time or recurring)
• Set up subscription-style billing (like membership, retainers, and maintenance plans)

ACH payments are popular with companies because they offer a fast, low-cost way to get paid over other small business payment methods. While customers can still reverse an ACH debit, they have a limited time to do so, which limits disputes and provides greater certainty on funds that will actually clear.

How ACH payments work

ACH payments use a structured process to move through the US financial system. The four stages to the ACH process are:

• Initiation and authorization: The person or business making the payment authorizes their bank, known as the Originating Depository Financial Institution (ODFI), to make the transfer. This could be for a payroll run, a recurring bill, or a vendor payment.
• Batch submission: Banks don’t send ACH transactions instantly. Instead, they collect them through the day and submit them in batches to the ACH network at scheduled intervals.
• Clearing and settlement: The ACH Network sorts through the batches and sends each one to the relevant receiving bank, known as the Receiving Depository Financial Institution (RDFI). The system then debits the originator’s account and credits the recipients.
• Deposit/withdrawal: The receiving bank then completes the transaction by adding the funds to your business checking account (or other nominated account) if it’s an ACH credit or withdrawing the authorized amount for an ACH debit.

The process works differently with Same Day ACH. There are multiple daily windows for submitting batches, which allows payments to complete within the same business day.

Types of ACH payments

With ACH payments, money moves in two ways: credit and debit. The difference is in who starts the transaction and how the money moves. Understand how both work helps companies better manage their incoming and outgoing payments.

ACH credit (direct deposit)

ACH credit pushes funds from the payer’s account to the recipient’s account. The company sending the payment sends instructions to their bank to transfer money directly to their vendor, customer, or employee.

Businesses use ACH credit for:

• Payroll
• Paying vendors
• Sending reimbursements (like overpaid invoices or returned deposits)

Example: A landscaping company runs payroll every other Friday using ACH credit. The business benefits because there’s no need to print checks or pay wire transfer fees. Employees benefit because they receive their wages on a set day.

ACH Debit (direct payment)

ACH debit pulls money from a payer’s account, but only after they get authorization. In this case, the company receiving the money, like a service provider or landlord, starts the transaction by requesting payment from their customer’s bank account.

Businesses use ACH debit to collect:

• Monthly retainers
• Subscription billing and recurring invoices
• Utilities, rent, and service plans

Example: An IT services business bills clients $500/month using ACH debit. Following client authorization, the business starts to automatically collect ACH payments from clients’ accounts. This saves them admin work and reduces the chance of late payments.

For the client, they don’t have to remember to pay each month and can enjoy interruption-free service.

What's the difference between ACH payment vs. wire transfers?

ACH payments and wire transfers share the following in common: they move money between different accounts electronically. But businesses tend to choose wire transfers when they need to pay or collect money as fast as possible. Some also use instant transfer features to access funds faster than standard ACH processing.

A quick side-by-side comparison:

An example of ACH payment vs. wire transfer

Let’s say a retailer owes a supplier $8,000 with Net 15-day terms. They want to place another order, but that will take them over their $10,000 credit limit.

The supplier won’t ship until the retailer has paid down the outstanding balance enough for the remainder plus the value of the new order to stay within the credit limit. Wire transfers will get there in almost all cases on the same day whereas, depending on cut-off times and processing windows, an ACH payment may take up to three.

How to accept ACH payments as a business

To accept ACH payments, you need to set up the right workflows in your business and get authorization from your customers. That’s especially so if you plan to use ACH debit for recurring payments.

Here’s an ACH payment setup checklist:

• Select a payment provider: Choose a payment partner like QuickBooks Payments for ACH invoicing and reconciliation. Many also allow you to accept credit cards or other payment methods through the same system.
• Implement account verification: Check you have typed in the customer’s details correctly to avoid payment bounces by using either a micro-deposit or instant verification.
• Collect customer authorization: Get the permission of your customer to set up ACH debit and keep a record, just in case they dispute it.
• Enter bank details securely: Use a secure form or portal to collect customers’ bank details instead of sending them via email.
• Process the ACH payment: Send the request and let the customer know when it should clear (usually 1-3 business days).
• Monitor for returns or failures: Ask your accounts receivable team to keep an eye out for bounces because of issues like insufficient funds. Make sure you follow up quickly to improve your chances of collecting payment. You could try another ACH payment or switch to an alternative method.

QuickBooks can help automate recording bills and paying them using QuickBooks Bill Pay—a built-in Accounts Payable automation solution for businesses that use QuickBooks.

When to use ACH payments

ACH transfers are a highly effective small business payment method. Use them to offer faster payment options to clients while cutting down on credit and debit card processing costs.

They’re also very handy for businesses that credit and debit card providers classify as “high risk”. For these firms, payment processors can stretch out the settlement window to two weeks after transactions take place, sometimes even longer.

For example, take a marketing agency, considered by some merchant processes as high risk. It bills its 20 clients $2,000 on the 1st of every month, totalling $40,000.

Here’s how collecting payments by ACH and card varies for this firm:

The advertising company saves on fees, increasing profitability, and gets paid faster, improving cash flow.

What are the benefits of ACH payments?

ACH payments offer a range of benefits for businesses. They make it easier to send and receive payments, which makes cash flow management easier. They’re also widely accepted, easy to set up, and integrate well into your accounting software.

The five main benefits to businesses of using ACH payments are:

1. Convenience

When a customer authorizes an ACH debit from their account, you can schedule and collect automatic payments from them. This is very useful for:

• Setting up recurring collection dates, like the first of every month
• Cutting down on credit control follow-up work with fewer reminder emails and chase-up phone calls
• Fewer payment disruptions than credit cards, because ACH debit cards don’t have expiry dates

2. Lower processing costs

For many businesses, ACH costs are lower than those of credit cards. On larger invoices or recurring billing, the difference can be substantial. A general rule of thumb is that the more you’re collecting from a customer, the better ACH payments are.

3. Enhanced security

ACH reduces the risks linked to paper checks and manual payments by using a secure, bank-operated system on both sides of the transaction.

ACH can still fail with the wrong account information or if there are insufficient funds. That’s why it’s important to verify account details and confirm the right information is in place before initiating any payment.

eChecks are essentially the same type of electronic payment as an ACH transfer in that they both use the ACH network. They both rely on routing and account numbers to initiate a payment.

4. Faster processing

ACH payments typically clear in one to three business days. They’re usually faster than paying by check, but they’re not always the fastest digital payment option. Wire transfers and credit cards (depending on your settlement window) can clear sooner. ACH is often best when you want to make a low-cost routine payment

If timing is really important on a particular payment, ask your bank about the daily administration windows they operate. Then, make sure you submit payments early enough in the day to meet the cut-off.

5. Increased retention

ACH payments make it easier for customers to settle their invoices directly from their bank accounts. Although many ACH payments are single, manual transfers, you can automate them using a service like QuickBooks Payments.

Set up autopay and recurring invoices in the software so customers don’t have to remember to pay you, and you don’t have to chase for payment.

How much does ACH payment processing cost?

The amount you pay for ACH transfers depends on your provider, the number of payments, and whether you’re sending or collecting funds.

Many providers charge either:

• A small percentage fee
• A flat per-transaction fee
• A capped percentage fee

Finding the right provider matters. For example, if you bill $5,000/month in retainers and pay 3% + $0.30 per card payment, your monthly and annual fees would be much greater than, say, a 1.25% ACH fee.

How long do ACH transfers take?

Most ACH transfers take one to three business days. The actual time depends on who you bank with, their internal processes, and the time and day you submit the transaction.

Choose the best payment setup for your business

Clients take the line of least resistance with payments. Reduce the friction in your payment system by letting them pay with their preferred method.

With QuickBooks Payments, you can send invoices automatically and accept digital payments online or through the mobile app. See the benefit on your bottom line, smooth out your cash flow, and reduce admin time spent chasing payments with ACH bank transfers.

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