ACH transfers: What are they & how do these payments work?

What you’ll learn:

- What ACH payments are and how to send/accept them

- How ACH payments compare to other forms of payment

- Advantages and disadvantages of ACH business transfers

Electronic payments are easy, affordable, and convenient for small businesses—but they can also be confusing. ACH, EFT, wire transfer…how do you know which one works best?

In this post, we’ll provide an overview of ACH payments and discuss the advantages and disadvantages of using this method of payment. We’ll also walk through the process of sending an ACH payment.

What is an ACH payment?

An ACH payment is an electronic funds transfer (EFT) that is processed through the Automated Clearing House network. Financial institutions use the Automated Clearing House network to process large batches of transactions, including direct deposit payments, tax refunds, and many other transactions.

There are two types of ACH payments: ACH credit payments and ACH debit payments. With an ACH credit payment, the payor initiates the transaction and sends the funds from their account to the payee’s account.

In an ACH debit payment, the payee initiates the transaction, and the funds are pulled from the payor’s account to the payee’s account. For example, when you set up a recurring monthly payment, the amount gets automatically debited from your account when the bill is due.

ACH transfers vs EFT payments vs wire transfers

EFT stands for Electronic Funds Transfer, an umbrella term that refers to the electronic transfer of money across a payment network (like a bank) between two parties (a sender and a receiver.)

ACH transfers and wire transfers are common types of EFT payments. All ACH transfers are processed through the Automated Clearing House network, while wire transfers are always processed through the Federal Reserve Wire Network.

The main difference between these payment methods is the speed, cost, and risk of the transaction. ACH transfers can take up to five business days to process, while wire transfers are typically processed within one business day.

So if you need to send payment quickly, you may want to consider using a wire transfer instead of an ACH transfer—just keep in mind that wire transfers cannot be canceled or refunded. There are also fewer fees associated with ACH payments.

How do ACH payments work?

Now that you understand what an ACH payment is, let’s break down how they work. When you send an ACH payment, the funds are transferred from your bank account to the payee’s bank account using the ACH network. A considerable number of transactions rely on this network, so multi-day processing times are standard.

To send an ACH payment, you need the following information:

- The name and address of the payee

- The payee’s bank routing number

- The payee’s bank account number

- The amount of money you want to transfer

How to set up ACH payments

If you think setting up ACH payments could be advantageous for your business, there are a few steps you need to take before you can successfully send these payments.

1. Gather payment information

1. Link bank accounts

1. Specify credit or debit

1. Send the payment

1. Gather payment information

First, you need to gather all the necessary information from the payee. This includes their name, address, bank routing number, and bank account number.

Having all the information on hand will simplify steps 2-4.

1. Link accounts

Next, you’ll need to link your bank account to the payee’s bank account. You can do this by filling out a form and providing the information you gathered in step one. Submit the form to your payment platform or bank.

1. Specify credit or debit

When you’re ready to send the payment, you’ll need to specify whether it’s an ACH credit payment or an ACH debit payment. With an ACH credit payment, you transfer funds from your account to the payee’s account.

With an ACH debit payment, the payee is responsible for initiating the transaction and debiting your account. No further action is required on your part.

1. Send the payment

Once you have all the necessary information and you’ve linked the accounts, you’re ready to send the payment. The funds will move from your account to the payee’s account using the ACH network.

Benefits of ACH payments

There are a few advantages to using ACH payment methods.

1. ACH payments are relatively low-cost. Most banks charge a flat fee for ACH transfers, which is often much lower than the fees charged for wire transfers.

1. ACH payments are typically processed faster than check payments, so you can expect to receive your funds faster.

1. ACH payments are easy to set up. Once you have all the necessary information from the payee, you can set up automatic recurring payments so you don’t have to remember to make a payment each month. This can be especially helpful if you have recurring bills.

1. ACH payments are versatile. You can use them to pay vendors, customers, employees, and contractors.

Disadvantages of ACH payments

There are a few disadvantages of using ACH payments that you should be aware of before deciding if this payment method is right for your business.

1. ACH payments can take up several business days to process. So if you need to send payment quickly, you may want to consider using an alternative payment method. (At Hopscotch, payments are instant and fee-free.)

1. There’s always the risk that something could go wrong with the ACH network, and your payment could be delayed or lost. While this is rare, it’s important to remember that bumps in any payment process can jeopardize your cash flow.

1. ACH payments are not always available for international transactions. So if you need to send money to a business or vendor in another country, you’ll need to use an alternative payment method.

Overall, ACH payments are a popular and convenient way to send money. But do they make sense for your business? It depends on your payment needs, process, and priorities.

How to accept ACH payments in my business

Accepting ACH business payments is also relatively simple. You will need to provide your business name, address, bank account number, and routing number to the payer. The payor will then initiate payment using the ACH network. Once processed, the funds will be transferred into your account.

If you sell subscription services, arranging ACH debits might be beneficial. In that case, the payor authorizes you to debit their account regularly. This is often done using a voided check or bank letter.

Make sending & accepting payments a breeze with Hopscotch

Hopscotch believes that sending and receiving payments should be the easiest part of your work day. We offer a secure and convenient platform for businesses of all sizes to send and receive payments. Our instant payment processing means you get your funds as soon as they’re sent — no waiting required. Plus, we never charge transaction fees.

Learn how Hopscotch can make accepting & sending payments easier for your business and sign up today to experience instant, fee-free payments.