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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.
In the third quarter of 2020, 6.8 billion payments were made on the ACH network, a 9% increase over the same time in 2019. But what is ACH, and should you be considering it for your small business?
ACH (automated clearing house payments) is a computer-based network for processing transactions. These transactions are primarily used between financial institutions but they can play a significant role for small business owners. ACH started in 1970 as an alternative to paper checks, as paper bills from businesses and consumers were in danger of eventually exceeding the ability of computer systems at the time to process checks efficiently.
Today, ACH is pervasive in day-to-day operations for small business owners. Here are just a few ways you might engage with the technology.
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.
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.
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.
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.
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).
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.
These are just a few ways small business owners can use ACH in their day-to-day operations. There are fees associated with the use of ACH but due to ease of use, fraud reduction, and short processing times, many owners choose this route over paper checks. ACH is just one type of EFT (electronic funds transfer) that businesses can use to move funds. EFT payments can include ACH, wire transfers, or other types of digital payments.
With the efficiency of speed and convenience of use, ACH is helping business owners cut down the time they may have otherwise spent purchasing ink or transporting checks to accomplish the same tasks.