ACH Loans: What They Are and How They Function
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What Is an ACH Loan All About?
An ACH loan, also known as a business cash advance, is a type of short-term financing for businesses. Unlike other loans, ACH loans are generally easier to qualify for because lenders can directly access your bank account for electronic repayments. With a business cash advance, you receive an advance on your future sales based on the last three to six months of your total sales revenue and expenses. Repayment is made by deducting a fixed percentage of your projected revenue over a period of 6, 12, or 18 months.
ACH loans and Merchant Cash Advances (MCAs) are often seen as similar. While an MCA is an advance based on your regular and predictable credit card transactions, an ACH loan is more of a “cash flow” loan. Instead of focusing on credit card transactions, the lender evaluates the average daily balance of your business checking account.
How Does an ACH Business Loan Operate?
The term “ACH” in an ACH loan primarily refers to how the lender receives payment. ACH allows the lender to withdraw a predetermined amount directly from your checking account at specified intervals. This differs from factoring accounts receivable because, instead of invoicing your customers and collecting payments from them, the lender directly accesses your account, similar to how automated payments are made for a mortgage or utility bill.
In essence, ACH loan repayments function much like the automatic payments you might set up for a credit card or utility bill, often using the Automated Clearing House system as well. Originally designed for businesses that process many credit or debit card transactions daily, such as restaurants or retail operations, ACH loans are now available to almost any business, even those not directly dealing with consumers. In these cases, lenders typically assess your bank deposit activity rather than your credit card transaction history.
Advantages of ACH Loans
1. Fast Funding Times
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2. Automated Payments
Many prefer the automated and fixed structure of ACH Loans because it eliminates the need to log into an account each month and deal with varying payment amounts.
3. Reduced Credit Score Requirements
ACH Loans are a great option if your FICO credit score isn’t perfect but you can demonstrate a steady stream of transactions into your business bank account. Plus, most lenders don’t require a hard credit check.
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