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n ACH transfer is a type of electronic transfer between banks. Making and receiving ACH transfers is quick, convenient, and free with an online business account like Novo. If you're a business owner, you might already use ACH transfers to pay your staff through direct deposit or pay bills and vendors online.

Not sure how to do an ACH transfer, or when you should opt for one? This guide will walk you through the ins and outs of ACH transfers, including how they work, their benefits, and their limitations.

What is an ACH transfer?

An ACH transfer is an electronic funds transfer between banks that allows money to be pulled from one account to another through the Automated Clearing House network (ACH). According to NACHA, the nonprofit association running the ACH, the network represents over 10,000 financial institutions. It facilitated more than 30 billion payments totaling over $77 trillion in 2022.

You can use ACH transfers for countless payments, including both business or personal expenses. These transfers range from external funds transfers to person-to-person payments. Other common ACH-driven transactions include bill payments and direct deposits from employers and government benefit programs.

How does an ACH transfer work?

When you make an ACH transfer, your funds move electronically through the ACH network instead of through a private card network such as MasterCard or Visa.

There are two different types of ACH transactions: ACH debit transactions and ACH credit transactions.

  • ACH debit transactions. Also referred to as "pull transactions," these involve money being pulled, or removed, from your account at another financial institution. An example includes an auto-payment of rent taken from your account each month.
  • ACH credit transactions. Also referred to as "push transactions," these involve pushing, or sending, money to different financial institutions' accounts. An example of this includes your direct payments to employees or receiving funds from your customers.

The ACH network is unique because it can push and pull funds between accounts at various banks, whereas most payment networks can only push or pull.

Process of ACH transfer

Each ACH transfer, whether a debit or credit transaction, follows the same process. Technically, each transfer takes seven steps, but we can summarize it into four basic stages.

  • Authorization: To initiate an ACH transfer, you need to be authorized by the receiving organization. Authorization is a one-time process requiring you to provide your account details. The organization or app you use should walk you through the authorization process.
  • Initiation: The originator, which is the individual or business making the payment, initiates each ACH transfer. The originator's bank then submits the entry to the ACH network. This initiation is often done in batches three or four times per day.
  • Transmission: The ACH entry is sent to an ACH operator, an institution within the network that facilitates transfers. The operator sorts batches of entries into credit or debit payments and sends them to their receiving institutions.
  • Settlement: The payment is settled once the recipient's bank confirms the transaction. That means the funds are credited to the sender (in a credit transaction) or deposited in the recipient's account (in a debit transaction).

Timelines and fees associated with ACH transfers

Most banks send out multiple batches of ACH entries per day, so there's a good chance your transfer will be transmitted the same day you initiate it. NACHA continuously enhances its Same Day ACH process, making same-day transfers the norm for most financial institutions.

There are some fees associated with ACH transfers, but banks such as Novo offering free ACH will cover those fees for you. Just keep in mind you may have limits on the number of transfers you can make per day, week, or month.

Novo Express ACH: Speed up your ACH Transfer Time

Novo is a business banking platform built with the needs of small businesses in mind, from sole proprietors to LLCs to corporations. Standard ACH transfers can be sent to and from a Novo business checking account, completely fee-free.

If you need to free up your cash flow and reduce waiting time further, Novo offers Express ACH, which significantly reduces the usual waiting period per transfer. While typical ACH transfers take between 1 and 3 days to process, Novo Express ACH enables you to initiate same-day or next-day ACH transfers for a nominal fee.

Benefits of ACH transfers for small businesses

Using ACH for your business payments is faster, cheaper, and more secure than check or credit card payments. Here's a quick breakdown of those benefits.

  • Cost-effective: ACH transfers cost less per transfer than card payments. Many banks today offer free ACH transfers with varying limitations.
  • Convenient and efficient: Once authorized as a sender or recipient, ACH allows you to quickly push and pull funds between your account and someone else's. That can make it easier to handle your monthly payroll or vendor payments.
  • Secure: ACH transfers are electronically run through the ACH network, with less risk of fraud than a check payment.
  • Increase cash flow: All that speed and affordability means boosted cash flow for your business.

Limitations of ACH transfers

Of course, nothing is without its downsides. Here's where ACH transfers fall short:

  • Limitations for high-value transactions: Your bank may limit the amount you can send via ACH.
  • Delayed transactions: ACH entries are sent in batches, which may delay your payment until the next batch is sent the next business day.

ACH transfer vs. wire transfer

A wire transfer is another method of moving money quickly between people or businesses without physically exchanging cash. Wire transfers usually process within minutes or hours after payment instruction is approved by the sending bank, in contrast with the multi-day wait for a standard ACH transfer. Because of the expense associated with them, wire transfers are most conducive for large-sum cash transfers and time-sensitive matters.

Ultimately, ACH transfers can take longer to process, but payments are cheaper than wire transfers. On the other hand, wire transfers tend to be quicker but cost more. Learn more about ACH versus wire transfers.

ACH transfer vs. credit card payments

When you make a payment with a credit card, the transaction is sent through the card's private network rather than the nonprofit ACH network. Credit card payments are generally more expensive than ACH transfers but can clear faster. Another advantage of credit card payments is that they offer guaranteed funds, meaning the payment is guaranteed to clear regardless of insufficient funds in the sender's account.

As a small business owner, you may rely on credit card payments to sell your products. However, ACH transfers might be more practical and cost-effective regarding your payroll, invoicing, vendor payments, and more.

The Takeaway

ACH transfers are an easy, cost-effective, and efficient method of both making and receiving payments for your small business. While transfer times can vary, they are an efficient and trusted transfer method.

Novo Platform Inc. strives to provide accurate information but cannot guarantee that this content is correct, complete, or up-to-date. This page is for informational purposes only and is not financial or legal advice nor an endorsement of any third-party products or services. All products and services are presented without warranty. Novo Platform Inc. does not provide any financial or legal advice, and you should consult your own financial, legal, or tax advisors.

Novo is a fintech, not a bank. Deposit account services provided by Middlesex Federal Savings, F. A.; Member FDIC.

May 21, 2023
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