ACH payment processing: what small businesses need to know

Consider accepting Automatic Clearing House (ACH) payments for your invoices. Not only is this convenient for your clients, boosting their satisfaction, but it can also significantly improve your cash flow and operational efficiency. Discover how one of the largest electronic funds transfer systems in the U.S. can be a game-changer for small businesses.

ACH payments are the cornerstone of electronic business transactions, offering businesses a secure, reliable, and cost-effective way to receive payments and manage cash flow.

The numbers speak volumes: In 2023, the ACH Network securely handled 31.5 billion payments valued at $80.1 trillion. 2023 also marked the 11th consecutive year in which ACH Network value increased by more than $1 trillion.

Read on to learn more about the ACH and how it can contribute to the success of independent business owners.

Jump to:

• What is ACH Payment Processing?
• How ACH payments benefit small businesses
• How ACH processing works
• What are the two types of ACH transactions?
• What are typical ACH transfer costs?
• ACH payments and security
• Pros and Cons of ACH
• What’s the difference between ACH payments, wire transfers, and EFT payments?
• What is an ACH payment processor?
• With HoneyBook, you can accept ACH payments and handle clientflow on one platform
• ACH and HoneyBook: powerful tools for small business success

What is ACH Payment Processing?

ACH stands for Automated Clearing House, a U.S. financial network used for electronic payments and money transfers. Also known as “direct payments,” ACH payments are a way to transfer money from one bank account to another without using paper checks, credit card networks, wire transfers, or cash.

Common ACH processing uses

• Direct deposit from an employer
• Paying bills with a bank account
• Transferring funds from one bank account to another
• Customers paying a service provider
• Businesses paying vendors and suppliers for products and services

How ACH payments benefit small businesses

ACH payments offer small businesses a wide range of benefits:

• Electronic invoicing eliminates the need for physical documents and reduces errors and delays typically associated with traditional payment methods.
• Offering multiple invoice payment options, including ACH transfers, gives customers greater flexibility and improves their invoice-paying experience.
• Real-time tracking keeps businesses informed on payment statuses, promoting close monitoring, accurate record-keeping, and seamless cash flow management.
• ACH payments enable businesses to automate recurring payments, ensuring timely bill payments and eliminating manual intervention.
• ACH payments allow businesses to customize due dates, enhancing customer satisfaction and fostering long-term success through repeat business.
• Implementing ACH payments provides an added level of security compared to traditional payment methods, reducing the risk of fraud and unauthorized transactions.
• ACH payments enable accurate cash flow forecasting through predictable schedules, allowing businesses to proactively manage expenses, investments, and optimize financial resources for growth and sustainability.
• ACH transfers are faster than traditional payment methods such as checks, usually taking only one or two business days to clear.
• The fee for an ACH transfer is typically either a flat fee of $0.20 to $1.50 or a percentage fee of up to 1.5%, whereas the typical credit card processing fees can be up to 3.5%.

By using ACH transactions for more efficient billing and collection processes, businesses can streamline their financial operations, improve customer relationships, and focus on driving growth and success.

How ACH processing works

An ACH bank transfer is a way of electronically transferring funds between two bank accounts. When the transfer is authorized and initiated by the originator, the National Automated Clearing House (Nacha), which is the organization that runs the ACH network, acts as a facilitator moving money between the sender’s bank account and the recipient’s bank account. Nacha ensures the security of funds transferred from one bank to another.

An ACH transfer involves the following steps:

1. Your business performs a service for a client and the client chooses to pay using an ACH bank transfer.
2. When the client wants to pay the invoice, they can initiate an ACH transfer with payment processing software such as HoneyBook.
3. The client provides their bank account number and their bank’s routing number, then authorizes a transfer.
4. The client’s bank will show up as the “originator” and your business’s bank would be the “recipient.”
5. The originator’s bank takes the deposit funds and batches them with other ACH payments that go through the ACH network once per day.
6. An ACH operator receives the batch of ACH transactions, including your client’s transaction.
7. The ACH operator sorts the batch and makes the deposit available to the recipient’s bank.
8. The recipient’s bank (your bank, in this case) receives the funds from the transaction.
9. A confirmation is sent to the ACH network and the originator’s bank that the payment went through.
10. In many cases, you can see the deposit on the same day your client paid the invoice, making ACH payments a quick method to accept payments.

How long do ACH payments take?

Typical ACH payments take one to two business days to process, though ACH offers a same-day service that usually comes with a higher fee for the payer.

It’s crucial to note that ACH transfers only occur on business days, so weekends and holidays can extend processing times. Additionally, the time of day when an ACH file is submitted matters, as banks typically have daily cutoff times for processing.

What are the two types of ACH transactions?

There are two types of ACH transactions:

ACH debit transfers

ACH debit transactions are a type of ACH transfer that pulls funds directly from a bank account. This means the payee (the one receiving the payment) initiates a withdrawal from the payer’s (the customer’s) designated bank account when the payment is due.

For example, when someone sets up a recurring monthly payment for a mortgage or utility bill, an ACH debit is used, and their checking account is debited automatically.

ACH debit transactions are also known as pull payments.

Examples of ACH debit transactions include:

1. Mortgage payments
2. Utility bills
3. Subscription services
4. Loan payments
5. Insurance premiums
6. Membership fees

These transactions typically occur on a regular schedule and are authorized by the account holder in advance.

ACH credit transfers

ACH credit transactions occur when a payer, typically a customer, initiates a transfer of funds to a payee, typically a merchant.

For example, when someone sets up payments through their bank or credit union to pay bills from their specified bank account, these payments would be processed as ACH credits.

ACH credit transactions are also known as push payments.

Examples of ACH credit transactions include:

1. Direct deposit of payroll
2. Tax refunds
3. Government benefits
4. Vendor payments
5. Person-to-Person (P2P) payments
6. Dividend payments
7. Customer refunds
8. Interest payments

Both types use the ACH network to facilitate electronic transfers between bank accounts without using card networks, wire transfers, paper checks, or cash.

What are typical ACH transfer costs?

There are lots of factors that affect ACH fee costs, including the number and size of transactions. Typical ACH processing costs for small businesses include:

Per-transaction fees:

• $0.20 to $1.50 per transaction
• 0.5% ri 1,5% of the transaction amount

Monthly fees:

• Account/service fee: $5 to $35 per month
• Minimum processing fee: $10 to $25 per month

Other fees:

• Setup/application fee: One-time fee, often waivable
• Batch fee: Less than $1 per batch
• ACH return fee: $2 to $5 per return
• ACH reversal/chargeback fee: $5 to $35 per instance
• High ticket surcharge: May apply for transactions over $5,000
• Expedited processing fee: For faster processing (varies)

Generally, ACH processing is less expensive than credit card processing, which can charge up to 3.5% plus $0.10 to $0.30 per transaction.

ACH is an attractive option for many small businesses, particularly for recurring payments or B2B transactions. When choosing an ACH payment processor, businesses should consider not only the fees but also factors such as transaction limits, ease of use, approval and payout speeds, and customer support.

ACH payments and security

ACH payments are generally considered safe and secure for businesses, with some key advantages and security measures in place:

• Low fraud rates: According to NACHA data, fewer than 0.03% of ACH transactions are returned as unauthorized, indicating a high level of security.
• Regulatory oversight: ACH transactions are regulated by the Federal Reserve Bank and the Electronic Fund Transfer Act, with rules established by NACHA.
• Authorization required: ACH debits require customer authorization before any money can be withdrawn from an account, adding an extra layer of security.
• Consumer protection: The Electronic Fund Transfer Act protects consumers from fraudulent ACH transactions, giving them 60 days to report unauthorized charges with no liability.
• Encryption and tokenization: Many ACH payment providers offer data encryption and tokenization similar to credit card industry standards.

ACH Pros and Cons

Pros

1. Cost-effective: ACH payments are significantly less expensive than wire transfers, checks, and credit card transactions, with average costs ranging from $0.26 to $0.50 per transaction.
2. Convenient for recurring payments: ACH excels in scenarios requiring recurring billing, like subscription services or memberships, allowing for automation of transactions.
3. Enhanced security: ACH payments are more secure than paper checks, incorporating features like tokenized payment data to reduce fraud risk.
4. Accuracy: The automated nature of ACH payments reduces the risk of human error in processing.
5. Direct bank-to-bank transfers: Money is transferred directly between accounts, with account numbers kept confidential.
6. Integration with accounting software: Many ACH payment processors offer integrations with popular accounting software, streamlining financial management.

Cons

1. Processing time: ACH transactions can take 1-3 business days to process, which may be slower than some other payment methods like wire transfers.
2. Limited to US accounts: ACH payments can only be made between US bank accounts, limiting international transactions.
3. Amount limits: Some banks impose limits on how much money can be transferred via ACH, which may affect large transactions.

Overall, ACH payments offer significant benefits in terms of cost, convenience, and security, especially for recurring transactions and high-volume payments. However, businesses should be aware of the processing times, transaction limits, and potential security risks when implementing ACH payment systems.

What’s the difference between ACH payments, wire transfers, and EFT payments?

Electronic funds transfer (EFT) is an umbrella term for all digital payments, whereas ACH is only a specific type of digital payment. An ACH payment happens when money is moved from one bank to another and is defined as either a direct deposit or direct payment. EFT payments are also called e-Payments because each transaction is completed online and doesn’t include paper checks in the payment process.

Some examples of a non-ACH EFT include:

• Bank wire transfers
• Credit and debit card transactions
• Digital wallets: Apple Pay/Google Pay
• Cryptocurrency payments

Unlike an ACH, many forms of EFTs don’t require the use of a bank account.

There is a big difference between the cost to send an ACH vs. a wire transfer, no matter if it is sent domestically or internationally. Receiving an ACH transfer is generally free and the average cost of sending one is around $3.

A wire transfer is a different story. Since it is more privatized and focused, a bank wire transfer will cost anywhere from $20 to $35 to send one and $10 to $20 to receive one. International transfers can add to this cost considerably.

An ACH transfer is the best to use for smaller transactions that aren’t time-sensitive, since they can take longer to process but are usually free. A wire transfer is the best to use for larger, cross-border transactions that need to be done quickly, but usually include a fee.

What is an ACH payment processor?

An ACH payment processor is a financial service provider that facilitates ACH (Automated Clearing House) transactions between banks on behalf of businesses and individuals. Here’s what you need to know about ACH payment processors:

ACH payment processors act as intermediaries between businesses and the ACH network, handling the technical aspects of initiating and managing ACH transactions. They typically offer services such as:

•     Initiating ACH credits (pushing funds to another account)
•     Initiating ACH debits (pulling funds from another account)
•     Managing recurring payments
•     Handling payment verification and security measures

With HoneyBook, you can accept ACH payments and handle clientflow on one platform

By using an all-in-one online clientflow management platform like HoneyBook, you can skip emailing PDF invoices or mailing paper invoices and forcing your clients to visit another website to pay their bills. All of this communication, invoicing, and payment processing can now be done in one place. Clients can pay their invoices using ACH transfers.

You can easily manage every aspect of your clientflow with HoneyBook, from contracts and scheduling to invoicing. Additionally, HoneyBook offers safe and secure payment processing built directly into the platform, allowing your clients to view and pay their invoices in one secure location. This saves clients the hassle of visiting multiple sites to communicate with you, see invoices, and pay the bill. On the HoneyBook platform, you can:

• Send legally compliant contracts to clients
• Get notified when clients sign contracts or pay invoices
• Send proposals and schedule bookings
• Use ready-made invoice templates
• Let your client pay their invoice on the HoneyBook mobile app
• Accept ACH payments with online payment software

ACH and HoneyBook: powerful tools for small business success

ACH payments not only improve client satisfaction by offering a convenient payment option, but also boost your cash flow and operational efficiency. HoneyBook, an all-in-one clientflow management platform, takes things a step further. It centralizes everything you need to manage your business effectively – track client information, automate communications, generate invoices, and more – all in one place. Together, ACH payments and HoneyBook can transform operational performance and client satisfaction.