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What is an ACH Business Loan?

Small businesses with poor credit may qualify for ACH business loans

An ACH business loan is a type of financing in which a lender automatically deducts scheduled payments from your business bank account via the automated clearing house (ACH). ACH loans are a quick and easy way for businesses with poor credit to access funding, but interest rates are high, and you’ll need to meet other requirements.

What are ACH business loans?

An ACH business loan — also referred to as an ACH advance or an ACH cash flow loan — is a type of loan where the borrower agrees to allow the lender to deduct payments directly from its business checking account in exchange for a lump sum.

ACH loans are good for startup businesses that haven’t established sufficient business credit yet or businesses with bad credit that don’t qualify for other types of lending. They may also be an option for any business with an immediate need for cash, says Misha Mikhaylov, a chartered financial analyst (CFA) and CEO of Llama Loan.

“ACH loans can be a solid choice for businesses needing quick capital to jump on growth opportunities or smooth over cash flow bumps but lack the credit.”

How do ACH business loans work?

Unlike other types of business lending, ACH loans typically don’t require high credit scores or collateral. Instead, lenders look at other factors, such as the borrower’s revenue history, bank account average balances and transaction history, to determine if your business qualifies for the loan.

The time frame from loan approval to the delivery of funds with ACH business loans is fast — a company could see the funds deposited in its account within one to three business days.

However, the speed and convenience of ACH loans come with a few conditions. For example, the interest rates are much higher than traditional loans, making them more expensive.

There may be additional fees, the loan amounts are generally smaller and the agreement requires consent to have the repayments automatically deducted from the business account. And unlike traditional loans, which typically come with monthly payments, ACH business loan agreements may stipulate weekly or even daily payments.

“Before you sign on the dotted line, make sure you’re OK with the fees, repayment schedule and the fact that they’ll be dipping into your bank account automatically,” advises Joe Camberato, CEO at National Business Capital.

How to get an ACH business loan

As mentioned, the approval process for an ACH business loan is fairly straightforward and won’t take a lot of time.

  1. Do your research. Shop multiple ACH loan options to find the best deal for you.
  2. Fill out the loan application. With many lenders, you can fill out the application online.
  3. Submit required documents. Provide the lender with the required documents. You may find a list on the lender’s website, such as bank statements, a driver’s license, etc.
  4. Review and sign loan approval. Once you’re approved, carefully read the loan agreement. If you agree with the terms, sign the agreement and fill out the ACH authorization for automatic payments by providing your bank account and routing numbers.
  5. Receive your funds. Wait for the loan funds to be deposited directly into your business account via ACH.

Requirements to get an ACH business loan

While it can be faster and easier to get approved for ACH business loans than for more traditional lending, you still need to provide the necessary documentation and meet the lender requirements. This may include:

  • Three to six months of bank account statements (lenders will want to see that the business carries a required minimum balance and makes regular deposits)
  • Revenue history
  • Business license
  • Driver’s license or other proof of identity
  • Canceled/voided check from the business checking account

The lender may also want to verify that the person applying for the loan is a majority owner in the business and that the business is not in bankruptcy.

How much does an ACH loan cost?

It’s difficult to quantify the actual cost of an ACH loan because so many factors come into play and lenders assess the interest differently. Some charge a standard interest rate that could equal a 100% APR or higher because the loan terms are often very short. Other lenders might charge a factor rate instead, which could be between 1.16 and 1.55, according to a firm that offers ACH loans.

For example, if you take out an ACH business loan for $10,000 and you have a factor rate of 1.3, you multiply those two numbers to find out the loan’s total cost. In this case, the total comes to $13,000 (not including any fees). Again, keep in mind that these are typically very short-term loans — months as opposed to years.

Pros of ACH business loans

There are several advantages to consider when looking into an ACH loan for your business.

  • Quick cash. The approval process for more traditional loans can be lengthy, but with an ACH business loan, you could have the money in your account within a few days.
  • More relaxed approval criteria. While some lenders may check your credit score for ACH loans, it’s not as important as other aspects of your business.
  • No collateral required. Some business loan lenders require collateral before extending a loan. Newer businesses, especially, may not have enough collateral to qualify for that type of lending.
  • Short-term financing. A company looking to jump on a quick opportunity to grow its business may not want a long-term loan to manage.

Cons of ACH business loans

It’s also important to be aware of the potential drawbacks of ACH business loans.

  • Higher interest rates. You’ll likely have to pay more in interest than you would with other types of business loans.
  • Additional fees. ACH business loans may come with additional fees or prepayment penalties that can significantly add to the total cost.
  • Smaller loan amounts. ACH loans are usually smaller, around $10,000 or less.
  • Strict repayment schedule. ACH loan lenders may require weekly or daily payments rather than more manageable monthly payments.
  • Need to maintain bank balance. Because of the strict repayment schedule, borrowers need to maintain enough money in the bank to cover the payments or risk defaulting on the loan.

When to consider an ACH business loan

ACH loans aren’t right for every business, but if you tick some or all of these boxes, this type of lending may be a good fit:

  • You have a poor credit score or insufficient credit history
  • You don’t have enough collateral to secure the loan
  • You need money quickly to cover monthly operating expenses
  • You need to make a one-time purchase or have another short-term goal for the funds

ACH business loan alternatives

ACH loans can be risky and expensive, so business owners may want to consider a few alternatives including other types of cash flow loans, working capital loans and more.

  • Invoice financing. Invoice financing involves borrowing a lump sum of cash based on the value of your unpaid invoices. Lenders may extend a loan amount of up to 90% of your invoices, but they will likely want to verify your customers’ payment histories.
  • Merchant cash advances. An MCA, or merchant cash advance, is a way to get quick funding by borrowing against your future debit and credit card sales. This type of lending is best for businesses with high sales volumes because repayment terms may require weekly or daily payments.
  • Business line of credit. Rather than borrowing a lump sum of money, a business line of credit is a revolving loan much like a business credit card, where you only borrow as much as you need up to your available credit limit. Lines of credit may come with variable interest rates, which can be tricky, but you only have to pay interest on the funds you use.

Compare other types of business loans

It’s important to do your research and compare reviews and loan details from multiple lenders before deciding which type of loan is right for your business.

Best for small businesses

Go to site
  • Required time in business: 6+ months
  • Required monthly revenue: $20k+
  • Min credit score: 550+

For a variety of finance options

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  • Required time in business: 6+ months
  • Required monthly revenue: $10k+
  • Min credit score: No credit needed

Best for business line of credit

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  • Required time in business: 1+ years
  • Required monthly revenue: Average of at least $3,000
  • Min credit score: 660

Bottom line

An ACH business loan isn’t best for every company. It might be the right move if you need quick funding, don’t have the best credit and don’t think you’ll have a problem repaying. However, you’ll have to stick to lower loan amounts, and you’ll pay more in interest compared to traditional business loans.

Frequently asked questions

Do ACH loan lenders charge prepayment penalties?

Not all lenders that offer ACH loans charge prepayment penalties. If you plan to pay off your loan early to save on interest, find a lender that doesn’t charge a prepayment penalty.

What happens if I miss a payment on my ACH loan?

At a minimum, if your bank balance falls short and you miss a payment, you’ll be charged a late fee from the lender and an insufficient funds fee from your own bank. At worst, you could end up defaulting on the loan.

Will ACH business loans affect my credit score?

Probably not. Many ACH lenders do not report to the credit bureaus, so even if you default, it may not hurt your business credit history. However, if that’s the case, an ACH loan also won’t help you to build business credit, which is an important goal.

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To make sure you get accurate and helpful information, this guide has been edited by Megan B. Shepherd as part of our fact-checking process.
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Written by

Writer

Lacey Stark is a freelance personal finance writer for Finder, specializing in banking, loans, investing, estate planning, and more. She has 20 years of experience writing and editing for magazines, newspapers, and online publications. A word nerd from childhood, Lacey officially got her start reporting on live sporting events and moved on to cover topics such as construction, technology, and travel before finding her niche in personal finance. Originally from New England, she received her bachelor’s degree from the University of Denver and completed a postgraduate journalism program at Metropolitan State University also in Denver. She currently lives in Chicagoland with her dog Chunk and likes to read and play golf. See full bio

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