ACH Transactions: What Every Small Business Should Know

ACH Transactions: What Every Small Business Should Know
ACH payments are among the lowest-cost and most secure payment methods, making them an ideal option for transferring funds for a wide range of purposes, including small business payments. Here's what every small business should know about ACH payments.
by Deborah Findling, Kira Deutch Jun 24, 2024 — 5 min read
ACH Transactions: What Every Small Business Should Know

This article is for educational purposes and does not constitute legal, employment, or tax advice. For specific advice applicable to your business, please contact a professional.

Automated Clearing House (ACH) payments are a method of sending funds directly from one financial account to another. ACH payments are among the lowest-cost and most secure payment methods, making them an ideal option for transferring funds for a wide range of purposes, including small business payments.

You may already be familiar with ACH transfers related to automatic bill payments and direct deposits. Here’s a closer look at how ACH payments work and what every small business should know about using them.

What are ACH payments and how do they work?

ACH payments are a form of electronic payment facilitated by the Federal Reserve Bank and managed by Nacha, the National Automated Clearing House Association. According to Nacha, there were 31.5 billion ACH Network payments made in 2023, valued at $80.1 trillion.

For successful processing, each ACH transfer in the batch needs a routing number, an account number, and an amount. The routing number indicates which bank the other party uses, and it is the same routing number found on the bottom of paper checks for the account. The account number indicates which account should be used for sending or receiving funds and also matches the account number on paper checks for the account.

What are ACH payments used for?

  1. Paying an employee: Small businesses can pay employees using ACH. To pay someone by ACH, you have to send payment instructions to their bank. An example of this is a direct deposit transaction for an employee receiving payroll checks and government benefits, which is typically set up through payroll software. To send payments, employers must have the recipient’s bank routing number, account number, and authorization as well as what type of account it is (savings or checking), although some payroll providers allow employees to enter this information on their own. This holds true for employers using ACH to pay an employee or a supplier, for example.
  2. Paying the government: Another use of ACH is paying taxes to the IRS. There are different types of electronic fund withdrawals for individuals and businesses with corresponding tax forms. “IRS USA Tax Payment” will be shown on your bank statement as proof of payment.
  3. Paying a supplier: ACH is a way to pay suppliers that require electronic payments. Using ACH to pay suppliers can help reduce the potential for fraud. While ACH fraud does occur, a 2019 Federal Reserve study found ACH payments to have the lowest fraud rate, approximately 8 cents for every $10,000 in payments. For large or small payments to suppliers, some small businesses prefer ACH due to the safety and convenience of sending payments electronically rather than by paper check.
  4. Moving funds: ACH transfers are a way to move money from one bank to another. While there is generally not a fee associated with receiving an ACH transfer, banks may charge a small fee to transfer money to a different bank. Additionally, many banks offer risk management tools for ACH, such as fraud and risk education or debit blocks.
  5. Accept payments from a customer: in order to accept ACH payments from a customer, that customer must authorize payments to your business’ bank, the vendor that processes your payments, and the accounting software provider (what allows you to create invoices).

What are the advantages and disadvantages of accepting ACH payments?

Accepting ACH payments can offer significant advantages for small businesses. One of the primary benefits is cost savings, as ACH transactions typically incur lower costs compared to credit card and check payments. Additionally, ACH payments are relatively fast, typically processing within one to two business days.

Ease of use is another compelling reason for small businesses to consider ACH payments. Setting up ACH transactions is straightforward and, once established, can effortlessly facilitate one-time or recurring payments. Moreover, ACH payments are generally secure, offering a reliable method of transferring funds with encryption and authentication processes.

Many banks allow businesses to enter ACH payments directly. For larger-scale needs, a partner like Square can help with ACH payments.

Advantages of ACH payments:


Disadvantages of ACH payments:

How long does ACH take?

Businesses can decide between two options for ACH payments. Associated fees and transaction dollar limits vary depending on the type of ACH payment. Common uses of same-day ACH payments include same-day payroll or account-to-account transfers.

Three to five business days: Delivery of ACH payments can take three to five business days. Unlike the real-time processing of wire transfers, ACH transfers are processed in batches three times a day. Each bank has a policy for when it makes funds available to customers so check your bank’s policy for payment delivery timing. (Remember that banking holidays will delay ACH payments.)

Same day: Same-day ACH capabilities have been available since 2016. In March of 2021, a third same day ACH processing window was added, increasing the opportunities businesses have per day to send same day ACH payments. Same-day ACH payments have a dollar limit of $100,000 per transaction.

Infographic: How small businesses can use ACH

What’s the difference between ACH payments and direct deposit?

ACH payments and direct deposits both rely on the ACH network, but they serve different purposes. Direct deposits are primarily used for payroll, where businesses transfer funds directly into employees’ bank accounts. This process ensures the timely and secure delivery of salaries and other regular payments to individuals.

On the other hand, ACH payments are used by businesses to pay other businesses or collect payments from customers. These transactions can include vendor payments, bill payments, and customer purchases. While both direct deposit and ACH payments use the same network, ACH payments typically facilitate business-to-business or customer-to-business transactions.

How to accept ACH payments with Square

Here’s a step-by-step process for setting up ACH payments using Square:

  1. Create a Square account. If you haven’t already, sign up for Square. Visit the Square website and follow the registration process.
  2. Verify your bank account. Link and verify your business bank account with Square. This will involve entering your bank details and confirming micro-deposits.
  3. Enable ACH payments. In your Square Dashboard, navigate to the payments section to enable ACH payments. Follow the prompts to complete this setup.
  4. Integrate ACH payments. Add the ACH payment option to your online checkout or invoicing system. Square provides tools and APIs to integrate ACH payments seamlessly.
  5. Inform customers. Let your customers know that ACH payments are now accepted. Update your website, invoices, and any other customer communication channels. As they’re one of the cheapest and more secure payment methods, they’re a win-win for customers and businesses.
  6. Monitor transactions. Your Square Dashboard allows you to keep track of ACH transactions. You can also review payments, manage any issues, and ensure that all transactions are processed correctly.

Common questions about ACH payments

To help you navigate the process of accepting ACH payments, here’s a look at some of the most frequently asked questions about ACH.

Do ACH payments cost money?

Depending on how you send and receive ACH payments, the cost is low or even free. Square charges 1% of each ACH transaction ($1 minimum) with no monthly fee or subscription required.

What bank information do you need in order to accept ACH payments?

The most important information for an ACH payment is the customer’s routing number and account number.

What is the 60-day rule for ACH?

Regulation E requires consumers to report unauthorized transactions within 60 days of receiving their bank statement to avoid liability for subsequent transactions. For example, if a statement is sent on January 31, the consumer has until March 31 to report unauthorized charges.

The Nacha 60-day rule focuses on the financial institution’s ability to recover transactions within 60 days from the settlement date. This means a bank can only return debits within this period.

What are the limits for sending ACH payments?

The largest ACH payment allowed by Nacha rules is $1 million. According to network standards, there’s no minimum, but a bank or other financial company may implement its own minimum.

Offer secure and efficient ACH transactions

ACH lies at the center of the U.S. payment system, offering a cost-effective, secure, and efficient way to handle transactions. Businesses that don’t already participate can consider offering ACH payments to meet their operational needs and enhance customer convenience.

If you’re looking at adding ACH payments to your business workflow, learn how Square provides an easy and reliable ACH solution to get started.

Deborah Findling
Deborah Findling is an Executive Managing Editor at Square. She also writes about investment, finance, accounting and other existing and emerging payment methods and technologies.
Kira Deutch
The Bottom Line is brought to you by a global team of collaborators who believe that anyone should be able to participate and thrive in the economy.


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