A staple in business lending, Automated Clearing House loans (ACH advance or cash flow funding/), can be invaluable to those small companies looking to get funds for expansion, new projects or even just to keep going through the slower times. Understanding how an ACH loan can benefit your business is important in this era when banks are increasingly shying away from lending small businesses money.
Automated Clearing House—What is it?
Basically, the Automated Clearing House represents an extensive network of financial institutions that handle the transfer of money between banks. On average, the ACH will deal with over 25 billion transactions of this nature.
An ACH transfer is when a borrower has a third party such as a lender directly withdraw funds from their bank account. Numerous forms of ACH payments currently exist—to include: payroll based transactions, business to business transfers, as well as various consumer interactions.
When dealing with an ACH loan, you're not necessarily talking about a loan per se, it really is an advance. You are in essence offering a percentage of all future revenue in exchange for a cash advance. And until that lump sum is paid in full, you will either daily or sometimes weekly be allowing the lending institution to withdraw money from your business checking account.
Lenders like this form of repayment as it tends to be easier to process; not to mention, because they are taking regular payments, they are forewarned should a problem arise. Also, as the borrower, you avoid any late payments and thus the penalties attached.
What Are the Benefits of an ACH Business Loan?
Actually, the benefits exist on both sides—as the borrower and lender get to experience the upsides to this type of loanrepayment plan. As far as the lender goes, their benefits include:
- Account verification
- There are automatic records of payments made
- Faster loan payments
- Lower processing fees than with check or credit card
And on the borrower's side, some of the benefits that come with ACH payments are:
- No collateral
- Credit score requirements are less strict
- An approval process is faster
- Automatic payments
What if You Have Bad Credit?
In the past, qualifying for a loan with bad credit was near impossible. However, with the advent of alternative lending, and especially with the rise of products such as ACH business loans, even those with less than perfect scores can still qualify.
Lenders are more focused on your business: how well is it doing, where is it headed, what kind of cash flow do you have, and how viable is your company. Largely, they will evaluate whether or not you have the cash to sustain a daily/weekly/monthly ACH payment. If this is the case, the approval process is much faster and easier than with a traditional loan product.
ACH financing, however, isn't the only game in town if you happen to have poor credit. Alternative lenders want to help. They want to see small businesses thrive and so there are a number of loan programs out there that even with bad credit, you may just be approved for. These include:
Invoice Financing. Basically, invoice financing involves the lender advancing you money based upon outstanding invoices that the company has. Usually, they will give you approximately 85% of the value of the invoices. In terms of fees, you can expect a 3% flat fee and then an additional percentage for the period of time over which the invoices are unpaid.
Equipment Financing. Whatever type of equipment your organization requires, many alternative lenders can help you get the money needed for purchase. If you own a salon, for instance, this may include chairs and dryers. If you have a construction firm, this could be a new backhoe. A credit score is not the end all here either; you can qualify with scores as low as 620.
Short-term Loan. These can have a repayment period ranging from 3 to 18 months. They do have higher rates than more traditional loans—but keep in mind, the repayment time is significantly shorter and so over the life of the loan, the interest may end up being less.
Lines of Credit. Again, these are on the shorter side and thus come with a higher APR. However, you can qualify with low credit scores, and you only pay interest on the amount used.
Applying for Your ACH Business Loan
One thing you can do to help speed the process along is to make sure you have everything ready when applying for your ACH loan. Some information you should have on hand:
- License
- A voided check
- Bank statements (may be up to 6 months/)
- Business license if applicable
Most alternative lenders will give you a decision in a matter of days if not sooner. And then as far as receiving the actual money, again this could be just a few days, or even within 24-48 hours.
When It Comes to ACH Loan Repayments
Above all else, you want to ensure that you can, in fact, make those daily and/or weekly payments. If the cash flow is not there, you can get yourself into some serious trouble. If for some reason you can't make your payment, don't delay contacting the lender. There may be room for some adjustments. Know beforehand though what penalties you might be subjected to upon failure to pay. Just keep enough cash in your business account so that the ACH transaction flows smoothly.
ACH loans are a great option regardless of what stage of business you're in. And especially with less than perfect credit, this could be a terrific way to get money for expansion, hiring new staff, buying equipment, even leasing larger office space. Again, just be sure to be responsible in your financial decision making—you do not want to get in over your head.
At First Union, we'd love to discuss your funding options as far as the different types of loan programs we offer. Call today and let's get started together!