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ACH loans: What are the pros and cons?

An advance on your business bank account deposits can help in a pinch. But watch out for high costs.

Chances are, your business uses automated clearing house (ACH) to transfer money from one bank account to another. If you've struggled to qualify for a bank loan, lenders offer an advance on those transactions as an alternative to traditional business loans.

While qualifications for ACH loans are more lax than traditional business loans, they're one of the most expensive types of financing out there. Weigh the benefits and drawbacks before you apply.

What is an ACH loan?

An ACH loan is a type of short-term financing based on the average daily balance of your business bank account. Sometimes known as a cashflow loan or ACH advance, these are usually available to small business owners with bad credit and startups.

They're one of the fastest business financing options available — you can often receive your funds within 24 hours. But it's also one of the most expensive financing options, with rates reaching upwards of 200% APR or more in some cases.

Pros of ACH loans

ACH advances are generally best for businesses that need working capital but can't qualify for traditional business financing. These are the main benefits:

  • It's easier to qualify for an ACH business loan than to most other financing options. In fact, a bad credit score won't count against you.
  • The quick turnaround means you can get funded within one business day with most ACH loan providers.
  • They're startup-friendly. You can often qualify with as little as six months or a year in business, as long as you meet the revenue requirements.
  • You don't need collateral to qualify for an ACH loan. In most cases, cashflow loans don't even require a lien on business assets or a personal guarantee from the business owners.
  • Automatic electronic payments reduce the risk to the lender — making it easier to qualify — and give you one less thing to remember while running your business.

Cons of ACH loans

These drawbacks may make you think twice before you move forward with an ACH loan application.

  • It's one of the most expensive types of business financing out there. Short terms combined with high fees often translate into APRs of 200% — or even higher.
  • Daily or weekly repayments can be inflexible if you have an unpredictable dip in sales and can't make a payment.
  • Automatic ACH payments can be difficult to pause if you have an emergency expense or experience a loss of revenue due to, say, a global pandemic.
  • Paying off your loan early won't save you money because it comes with a fixed fee instead of interest. That is, unless your lender offers an early repayment discount.
  • Payments won't improve your business credit score since ACH loan providers generally don't report payments to credit bureaus.

Compare lenders that offer ACH loans

These companies either directly offer ACH loans to small businesses or can connect you to an ACH loan provider.

Name Product Filter Values Loan amount APR Requirements

OnDeck small business loans
Finder Rating: 4.7 / 5: ★★★★★

OnDeck small business loans
$5,000 – $250,000
As low as 35%
600+ personal credit score, 1 year in business, $100,000+ annual revenue
A leading online business lender offering flexible financing at competitive fixed rates.

Fora Financial business loans
Finder Rating: 3.4 / 5: ★★★★★

Fora Financial business loans
$5,000 – $500,000
Varies
6+ months in business, $12,000+ monthly revenue, no open bankruptcies
Get qualified for funding in minutes for up to $500,000 without affecting your credit score. Best for companies with at least six figures in annual revenue.

Lendio business loans
Finder Rating: 4.75 / 5: ★★★★★

Lendio business loans
$500 – $5,000,000
Starting at 6%
Operate business in US or Canada, have a business bank account, 560+ personal credit score
Submit one simple application to potentially get offers from a network of over 300 legit business lenders.

ROK Financial business loans
Finder Rating: 4.7 / 5: ★★★★★

ROK Financial business loans
$10,000 – $5,000,000
Starting at 6%
Eligibility criteria 3+ months in business, $15,000+ in monthly gross sales or $180,000+ in annual sales
A connection service for all types of businesses — even startups.

LendingClub personal loans for business

LendingClub personal loans for business
$1,000 – $40,000
8.05% to 35.89%
US citizen or permanent resident, verifiable bank account, steady source of income, ages 18+.
Get prequalified for a personal loan up to $40,000 to help you grow your business. Great for new business owners with at least fair credit.

Rapid Finance small business loans
Finder Rating: 3.74 / 5: ★★★★★

Rapid Finance small business loans
$5,000 – $1,000,000
Fee based
Steady flow of credit card sales, bad credit OK

Fundbox business loans
Finder Rating: 4.76 / 5: ★★★★★

Fundbox business loans
$1,000 – $150,000
4.99%
You must have an established business.
Get flat rate, short-term financing based on the financial health of your business, not your credit score.

National Funding business loans
Finder Rating: 4.75 / 5: ★★★★★

National Funding business loans
$5,000 – $500,000
4% to 8%
Be in business at least one year and make at least $150,000 in annual sales. Other loan types have additional requirements.
Working capital loans and equipment financing, some high-risk industries may be eligible.

FundThrough Express business cash advances

FundThrough Express business cash advances
$500 – $10,000,000
Not applicable
Considers your business’s invoicing and banking history
Get an advance of up to $50,000 in just one day with this fully automated platform.
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Compare up to 4 providers

Common uses

Business owners typically use ACH advances for the following purposes:

  • Working capital
  • Emergency expenses
  • Buying inventory or supplies
  • Cash flow
  • Growth or expansion
  • Marketing

Some businesses also use ACH loans for small equipment purchases. But consider equipment financing first.

Equipment loans actually have a higher rate of approval than any other type of credit, according to the Federal Reserve. And because collateral is built into the loan, equipment financing usually comes with lower rates than an ACH loan.

ACH loan costs

Cashflow loans typically come with two main fees: a factor rate and an origination fee.

  • Factor rates are a number that you multiply by your ACH advance amount to get the total cost of your loan. Usually these start at 1.1 and can run as high as 3.0.
  • Origination fees are a percentage of the advance that your lender deducts or adds to your loan amount at closing. Usually these range from 0% to 5%.

Usually you have six to 18 months to repay the advance — though sometimes terms are as short as three months.

ACH advance cost example

Let's take a look at an example of how much an ACH loan costs. Say you took out a $10,000 cashflow loan with a factor rate of 1.5 and a 4% origination fee. That would cost your small business a total of $5,400: $5,000 from the factor rate and $400 for the origination fee.

The short terms combined with the high fees are what contribute to the high APR. If the loan from my example had a six-month term, the cost would be equivalent to an APR just over 360%. That's the same kind of rate you'll find on a payday loan.

Where to find ACH loans

Online lenders are the most common type of ACH business loan provider. Cashflow loans are particularly common with online lenders that specialize in bad credit or alternative small business loans.

Companies like National Business Capital, Fast Capital 360 and AdvancePoint Capital often offer them alongside similar products like merchant cash advances, short-term loans and accounts receivable financing.

Using an online connection service like Lendio can also help you compare multiple ACH loan offers. These allow you to quickly prequalify with several lenders to see which might offer your small business the lowest factor rates and most favorable terms.

ACH loan qualifications

Requirements are relatively flexible compared to other types of small business financing. Generally, you need to meet these criteria to qualify for an ACH loan:

  • Active business checking account that accepts ACH transactions
  • At least $5,000 in monthly deposits
  • At least six months in business

Small business owners can almost always qualify with bad credit — even if your credit score is under 500. And while not a requirement, it helps if your business gets most of its revenue in direct deposit payments instead of credit and debit card sales.

How to apply for an ACH loan

While the application process depends on the lender, you can usually apply for an ACH business loan by following a few general steps.

  1. Compare providers that offer ACH loans by looking at factor rates, origination fees, terms and loan amounts available.
  2. Prequalify with your top choices or use a service like Lendio to see which providers might be a good fit.
  3. Fill out the application by providing information about yourself and your business's revenue.
  4. Connect your business' checking account or submit bank statements and a copy of a voided check to the lender.
  5. Review and sign your closing documents, paying attention to the fees and loan payment terms.

Once approved, your lender will send the funds to your business checking account within 24 hours of approval.

How repayment works

With an ACH loan, your lender will automatically deduct loan payments from your checking account on a daily or weekly basis. These repayments are usually between 10% and 20% of a percentage of your deposits.

However, many lenders also have a minimum monthly payment that you must meet regardless of deposits. If you can't meet this deposit or your bank account doesn't have enough funds, the lender often charges a fee.

Bottom line

ACH loans may have easy-to-meet requirements, but the high cost and inflexible loan payments mean it's best to save for emergencies. Compare other small business loan options by reading our guide to business financing.

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