As more people move away from traditional payment methods like cash and checks, businesses are looking for electronic ways to make and accept payments. As a popular way to move money digitally, ACH transfers are generally at the top of the list.
An ACH (Automated Clearing House) payment, or ACH transfer, is a direct payment method that can electronically transfer money between banking accounts or banking networks in the United States. This enables businesses or people to send money to each other without having to deposit the money into a third-party service first.
Understanding the many ways to send, transfer, and receive money is essential to sustaining your business as a merchant — and that starts with ACH payments.
These transfers allow both business owners and customers to take funds directly from their respective bank accounts instead of processing a transaction with a credit card, paper check, wire transfer, or cash. In other words, ACH payments facilitate the transfer of funds between bank accounts via a centralized clearing system.
There are two types of ACH payments: credit and debit. Here’s what they mean:
ACH transfers are convenient, fast, and versatile, making them a preferred alternative to writing a check. And there are many ways a business may leverage this payment method.
The most common examples of ACH payment transfers are:
An example of an ACH payment can be found across almost every business interaction. A business owner can pay their supplier invoices, pay an employee, fund employee retirement accounts, issue refunds to customers, pay taxes or receive refunds, and make donations to nonprofit charitable partners, all by using direct payment ACH transfers.
In the world of ACH payments, it’s important to familiarize yourself with common transaction terms that may come up when sending or receiving money.
Before sending an ACH payment, you’ll typically need the following information:
Some reasons why ACH payments can be rejected include:
As a business owner, here are some potential benefits of ACH payments:
There are some disadvantages and limitations of ACH payments, such as:
ACH transfers are processed through the Automated Clearing House network, which is only used to transfer money from bank to bank. While debit and credit card payments are also electronic, they use different payment networks managed by companies like Visa, Mastercard, and American Express.
Because the ACH network sends payments out in batches, it can often take longer for a payment to move from one bank to another. Credit card transactions, on the other hand, are usually processed in seconds.
One advantage of ACH transfers is they require authorization between your bank and the receiving bank. This can help reduce the chances of chargebacks arising from a customer disputing a transaction and demanding a refund.
ACH transfers tend to cost less than other payment transfer methods, which is one reason why it's one of the more popular payment transfer methods for small businesses.
At some banks, ACH transfers are free. Others may charge a flat rate per transfer, ranging from $.25 to $3.
Because ACH transfers are usually processed, sent, and received in bulk on a predetermined schedule throughout the day, the time it takes to complete a transaction will vary depending on the day and time the payment was initiated, which banks are involved in the transfer, and if there are any errors along the way.
That said, ACH transfers usually take about one to four business days to complete, which is like the time it takes to process a check after it's been deposited. Some financial institutions offer expedited processing of ACH transfers, which may require an extra fee.
A wire transfer is another way to move money electronically from one bank to another. The main difference is that a wire transfer is a direct transfer between two financial institutions, while an ACH transfer moves the money through the ACH network.
Because a wire transfer is direct, it can be cleared within minutes, making it the faster way to send money. However, wire transfers can be costly, with banks charging both the sender and the recipient. Fees can range from $0 to $50, which can add up if you regularly transfer funds.
Is ACH the same as direct deposit? Here’s the difference between ACH and direct deposit: Direct deposits fall under the umbrella of ACH payments. Because direct deposit is a specific type of ACH payment, it primarily focuses on depositing funds directly into an individual's account.
In general, ACH refers to a system that can electronically move funds between bank accounts for various types of transactions, including deposits, withdrawals, and transfers. When it comes to ACH direct deposits, they’re commonly used for employee payroll.
While ACH transfers are often the right tool for the job, keep in mind that there are alternative payment methods and checkout payment methods to send money that may be faster or more cost-effective, including:
PayPal business solutions make it easy to accept ACH transfers, along with other popular payment methods like credit cards, debit cards, PayPal, and more.
In partnership with three expert business owners, the PayPal Bootcamp includes practical checklists and a short video loaded with tips to help take your business to the next level.
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