The complex electronic system, upon which the modern financial world is hugely dependent, has slowly and methodically reduced the need for paper checks, and in many instances cash! While it’s challenging to consider a world without cash or the use of paper checks, the reality is many business owners have learned to appreciate the speed and the convenience of a new breed of business lending — the ACH Business Loan.
Automated Clearing House (ACH) Business Loans offer benefits to borrowers and to those creditors who have agreed to fund these unsecured, high-risk loan products. In many ways, ACH Business Loans are a win-win situation for lenders and borrowers alike.
Business owners in need of fast-cash now have a viable lending opportunity where there once was none. Lenders now have a lending conduit in which to invest in higher-priced (i.e. higher interest rates) loans. The higher rates charged reflect the risky nature of ACH Business Loan scenarios.
ACH business loans mostly refer to the ways in which monies are transferred between lender and borrower. Lenders prefer this innovative loan product as the loan’s repayments are automatically withdrawn from the borrower’s account in accordance with the mutually agreed upon loan terms — daily, weekly, monthly, etc. This repayment arrangement mitigates a significant amount of lending risk.
Who is the Automated Clearing House (ACH)?
The Automated Clearing House (ACH) network idea was first proposed near the end of the 1960s. Several financial institutions in California brainstormed, and subsequently alerted the financial industry that an ACH network could lower the cost of credit/debit transfer between financial corporations. The ACH has been designed for high volume financial transactions. Each transaction generally takes a fraction of a second to process. The speed of the transaction is one of the reasons the ACH can operate on low-profit margins.
ACH Business Loans for Small Businesses
In general, small businesses struggle when first opening due to a lack of liquid funds. New business owners and entrepreneurs often find themselves smack in the middle of a paradoxical dilemma; what Joseph Heller famously named — the Catch-22.
In this instance, the Catch-22 facing new business owners is that they are in need of cash to implement a well-formed business plan. However, lenders are typically reluctant to lend money to business owners who do not have a documented business history to verify that the business will meet their repayment obligations. Hence, the Catch-22.
When approved, an ACH Business Loan’s proceeds are electronically transferred to the borrower’s account. The lender has been authorized to withdraw the agreed-upon payment (i.e. weekly or monthly, etc.) automatically from the business account.
For those who prefer the more conventional money management tool of a paper check, an ACH Business Loan might not be the right fit. There are a few creditors who will offer similar financial products that allow for repayment by paper checks, however, they generally add a fee to cover the cost of the handling the paper check.
Getting Approved for ACH Business Loans
As one would expect, the most convenient way to apply for an ACH Business Loan is online. However, before you apply, spend time gathering enough information to make an educated decision on the creditor you choose.
The good news is the innovative ACH Business Loan’s online application process is significantly simpler than the laborious applications of the previous versions of business financing products.
General ACH Underwriting Guidelines
It is important to emphasize that ACH Business Loans are revenue-based loans. They are approved based upon the monthly average of cash flowing through the business’ checking account(s). The regularity (and the amount) of money flowing through the business is one of the main facets of a loan approval. Average monthly business deposits will also determine the approved loan amount.
Each lender defines the exact criteria to be met for a loan approval. However, there are several broad-spectrum guidelines you can use if you are considering ACH Business Loans to solve your financial needs.
- A Credit Score– your credit score must be greater than 500– an easy benchmark to meet.
- Business Length of Operation– a business must be at least six months old.
- Financial Account Statements– for most alternative lenders, the monthly average deposit must exceed $10,000.
- Insufficient Funds (NSFs)– the financial statements provided should not reveal more than three NSFs each month.
- Collateral Requirements– collateral is not required.
- Company Financials– typically not required.
When approved, a borrower will sign the ACH loan agreement issued by the bank. This legally enforceable contract will disclose the ACH’s terms –
- The Loan’s Duration.
- The Loan Amount.
- The Interest Rate.
- A Schedule of Payments.
ACH Business Loans- The Pros And Cons for a Business Owner
With an ACH Business Loan, a business is essentially borrowing money against the business’ future earnings. The lender is essentially ‘betting’ on the fact that the business’ thin business history and limited financials offered at application will extend into the future. In reality, the decision to lend using this loan product is not as shortsighted as it first appears. Lenders have learned that past credit-use behavior is, more often than not, an accurate predictor of future behavior.
- Lightning fast approval processes.
- Speedy Funding, especially if you compare it to the funding times of tradition business loans.
- Reduced Credit Criteria for Approval.
- Automatic Payments– reduced anxiety about remembering to pay bills on time.
- Reduced Expenses in terms of money transfers, postage, and paper checks.
- Automatic written recordkeeping that can be accessed at a later date for any purpose.
- Higher Interest Rates to compensate the lender for risky lending scenarios.
- ACH Business Loans should be used for short term financing objectives like purchasing inventory or marketing materials to get the business off the ground. The higher rates for these innovative loan products should be avoided for long term funding objectives.
How ACH Loans Differ from Other Types of Business Loans?
An ACH Business Loan differs from most other business loan products because it is a revenue-based loan. The size of the ACH loan is primarily contingent upon a business’ monthly cash flow, and not, the business’ income. Other business loans qualify their borrowers based upon a documented history of the business’ earnings.
Business owners and entrepreneurs now have a lending option that circumvents most of the lending requirements of the traditional business loan. ACH Business Loans are a great financing option; however, it is a loan product that must be fully understood before you sign on the dotted line.
Short on cash?
Seize the ACH opportunity!
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