What are ACH payments? A business owner’s guide

An Automated Clearing House (ACH) payment is a method of transferring funds electronically. ACH payments can be used to move money from one account to another at the same bank or between two separate banks. There are several reasons you might use ACH transfers for your small business. For example, you might use ACH to move money between your own bank accounts, initiate direct deposit, or settle debit and credit card transactions.

In this guide, we’re taking an up-close look at ACH payments and how they work. Plus, we’ll discuss the benefits and drawbacks of ACH and answer some FAQs. Read through for a detailed explanation of this transaction type or use the links below to navigate throughout the text.

How ACH payments work

  • Before we get into the step-by-step process, let’s first cover the origins of ACH. According to the Federal Reserve Bank of New York, ACH was designed to minimize the use of paper checks for recurring payments like bills and payroll. Today, ACH payments account for nearly 90% of the total value of transactions processed in the United States. These transactions include recurring bill payments, direct payments, direct deposit, tax refunds, and more.
Illustration of donut chart with 90% filled, including text “More than 90% of the total value of transactions processed in the U.S. use ACH. Source: Plaid”

The Automated Clearing House (ACH) network makes ACH payments possible. The ACH network is a system that facilitates electronic funds transfers (EFT) within the U.S. The National Automated Clearing House Association, or Nacha for short, developed the technology behind ACH. Currently, Nacha continues to set guidelines and oversee the expanding ACH process.

So what does an ACH transaction actually look like?

To process an ACH payment, there must be an exchange of bank account numbers and routing information. If your business wants to set up direct deposit for your employees, for example, you will need to collect their banking information. When it’s time to process payroll, your bank account will show a credited amount for each check to be debited to the appropriate employee’s bank account.

Let’s break this example down even further:

  1. As the originator of the payment, your bank will send an ACH file containing the transaction amount and the receiving party’s account information. Your bank is considered the originating depository financial institution (ODFI). The recipient’s bank (in this instance, your employee’s bank) is the receiving depository financial institution (RDFI).
  2. Your bank will credit your account and debit the recipient’s account for the appropriate amount. However, the transaction will appear as “pending” on your bank statement until it has gone through a clearing house.
  3. At the end of the day, your bank will send the clearing house a batch of all ACH files it received that day.
  4. The clearing house will then sort and distribute ACH files to the banks on the receiving end of the transaction. In the example of payroll, the ACH files will be sent to your employees’ banks.
  5. After collecting the ACH files, the receiving bank will make a note to debit the employee’s account for the amount requested. At this point, the funds will still be pending.
  6. Once the clearing house posts the debit and credit amounts in batches to each party’s bank, the transactions move into the settlement process.
  7. After sufficient funds have been verified, the money will be withdrawn from your account and transferred into your employees’ accounts.

What are ACH payments used for?

ACH transfers can be used to initiate the following types of transactions:

  • Payroll
  • Online bill payment
  • Tax refunds
  • Credit card payments
  • Money transfers
  • Interest payments
  • Annuity payments
  • Employer reimbursements
  • Mortgage and loan repayment
  • Person-to-person (P2P) transactions
  • Business-to-customer (B2C) transactions
  • Business to business (B2B) transactions

ACH transfers vs. wire transfers

Both ACH and wire transfers are methods for sending money electronically. However, each system has key differences that are important to note; let’s take a look:

  • ACH payments typically take 1–3 business days to process while wire transfers are processed in real time.
  • ACH transactions are usually free or lower cost than wire transfers, averaging $23 for domestic outbound transactions and $6 for domestic inbound transactions. Alternatively, wire transfer fees range anywhere between $10–$32 for domestic transactions.
  • ACH transfers process via a partnership between your bank and a clearing house. Wire transfers, on the other hand, only go through banks.

Both wire and ACH transfers are considered to be relatively safe for individuals and businesses. However, it’s always a good idea to take precautions to keep your business data secure.

How to accept ACH payments within your small business

Accepting multiple payment types increases your ability to make transactions between customers, employees, and other entities. In other words, you have more flexibility to send and receive money, which is almost always a good thing for business. We’ll discuss the pros and cons of ACH payments in more detail below.

For now, let’s talk about the steps to take so your business can start accepting ACH payments:

  1. Assess the value—how often will you use ACH?
  2. Select an ACH provider
  3. Establish an ACH merchant account
  4. Choose ACH payment types and get customer authorization
  5. Enter payment details
  6. Initiate payment

The benefits of ACH payments for small businesses

Before making any important decision for your business, it’s a good idea to assess the benefits and drawbacks. Setting up ACH payments can offer three main bene


Convenience is one of the primary benefits of adding ACH to your list of accepted payments. In the digital age, offering digital payment options is standard for most industries. For many customers, having online and automated billing is a big selling point. Rather than having to remember due dates and mail paper checks, your clients can settle their payments online with little effort.

Additionally, accepting ACH payments allows your business to take credit and debit cards because these transactions occur over the ACH network. This gives customers who no longer carry cash or paper checks the option to continue shopping from your business using their preferred payment method.

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ACH not only opens the door to convenient online billing and cashless payment, it also allows you to easily

Lower processing costs

The expenses associated with running a small business seem endless, and the last thing you want is to spend money to send or receive money. ACH offers a low-cost—sometimes free—alternative to other electronic payment methods, such as wire transfers.

According to the Association for Financial Professionals, the median internal costs for sending and receiving ACH payments is $0.29 while external costs are around $0.27.

Illustration of man on laptop, with the text “the median internal costs for sending and receiving ACH payments is $0.29 and the median external costs are approximately $0.27.”

Increased retention

For the most part, increased convenience means greater customer commitment, and the same is true for ACH payments. Offering an easy way for your customers to make payments gives them more reason to stick around, which means consistency for your bottom line.

Plus, when it comes to payroll management, offering direct deposit through ACH can be a major benefit for your team. A QuickBooks survey found 75% of employees prefer to receive their pay via direct deposit. There’s no need to distribute and collect paper checks on payday when ACH funds are deposited directly into their checking accounts. Convenient and reliable payments can make a big difference in terms of employee happiness.

Illustration of woman on laptop, with the text “More than 93% of U.S. workers receive their pay by direct deposit. Source: National Payroll Week”

The drawbacks of ACH payments

Now that you’re familiar with the potential benefits ACH can offer your business, let’s consider the drawbacks associated with this electronic payment method.

Transaction limits

According to Nacha, ACH transactions are limited to $100K per day, which was recently increased from the previous $25K limit. For many small businesses, this transaction limit won’t compromise operations. It may become problematic for larger companies running payroll or transferring funds in high volume, however.

Illustration of woman on desktop, with the text “ACH transactions are limited to $100,000 per day. Source: NACHA”

Additionally, if you plan to make ACH transfers through your savings account, there is a limit of six transactions per month. This rule is in accordance with Federal Reserve Board Regulation D.

Security risks

Because ACH payment processing relies on sharing important details like bank account information and routing numbers, some level of security risk is involved. However, Nacha continues to revise its data security requirements; its most recent improvement rolled out in 2020.

The Office of the Comptroller of the Currency advises banks and service providers in the ACH network to minimize risk with strong security systems. When selecting a bank to process ACH transfers for your business, make sure to do your research to find a reputable provider.

Processing time

ACH payments go through a clearing house in batches, and there can be a 1-3 day delay before funds are actually posted. If your business needs immediate transfers, ACH may not be the best option for you. But if your transfer requirements are more relaxed or you have time to plan ahead, ACH can be a cost-effective and convenient route.

Frequently asked questions about ACH payments

If you’ve wondered “what is an ACH payment?” and still have more questions, refer to our FAQ guide below.

Are ACH payments safe?

ACH debit payments are generally considered to be a safe option for sending money. Nacha views ACH payments as secure because data is handled electronically and transactions pass through far fewer hands compared to paper checks.

How long do ACH payments take to process?

ACH payments generally take 1–3 days to process. Unlike wire transfers that are completed instantly, ACH transfers are handled in batches.

How much does it cost to process ACH payments?

One of the main benefits of ACH payments is their low cost. Fees are generally less than one dollar per transaction, and they are sometimes offered as a complimentary service.

What is the difference between ACH payments and direct deposit?

ACH payment is the system that makes direct deposit a payment option for businesses. When you make a direct deposit to your employees, you’re using ACH processing to do it.

Final notes

ACH payments can be a convenient option for small businesses to facilitate direct payments, payroll, and other transactions electronically. Like any major decision you make, it’s important to consider the pros and cons before deciding whether ACH is right for your small business. Use this guide to learn the basics about ACH payments and how they might benefit your business.

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