Key insights:
- An ACH payment is an electronic transfer of funds between bank accounts via a centralized national network
- ACH transfers typically take 1 to 3 business days to process and settle
- Businesses may use ACH payments to streamline payroll operations and vendor transactions
- Alternatives to ACH payments include wire transfers and peer-to-peer payment applications
If you’ve received funds directly to your bank account, chances are you’ve already used Automated Clearing House (ACH) payments. The ACH is a national payment network that helps you send and receive money electronically. It’s commonly used for many types of transactions, from receiving paychecks via direct deposit to paying bills.
Understanding how to do an ACH transfer could help you manage your cash flow more effectively. Let’s explore how ACH payments work, their pros and cons and how to set them up for your small business.
How do ACH payments work?
ACH payments are electronic payments that pass through the ACH network, which connects roughly 10,000 U.S. financial institutions. These payments go into or out of your personal or business bank account. Once initiated, an ACH payment is added to a batch. The network settles these batches 4 times each business day.
To send money, you’ll need to provide the recipient’s bank account type, routing and account number, the payment amount and the business name. If someone is sending you money, they’ll need your details, routing and account number, account type and the name on the account (yours or your business’s).
There are 2 types of ACH payments: credits and debits.
ACH credits
An ACH credit is a deposit to your account. Getting your paycheck via direct deposit is a credit. Credits could be made as soon as the same business day and processed in just a few hours.
ACH debits
ACH debit payments transfer money from your bank account to another person. You might use a debit to pay a utility bill. When you set up a debit from your account, you can choose the payment date.
Pros and cons of ACH payments
ACH payments offer convenient options for business owners, but they also come with drawbacks. Let’s explore them both.
Pros of ACH payments
- Convenient payment option for recurring bills and invoices
- Typically free for consumers, while businesses might pay a small fee
- Could allow for same-day payments, depending on your financial institution
- Payments might be reversible in specific situations
Cons of ACH payments
- It sometimes takes days to process these payments, such as during weekends and holidays
- Your bank might cap how much money you transfer daily or monthly
How to set up ACH payments
How you set up an ACH payment depends on whether you are initiating a debit or a credit. It also depends on whether you set it up through the bank or a vendor.
If you’re setting up a payment on a utility website, you might need to locate the payment section and enter your bank account details. If you’re paying a vendor from your business bank account, you’ll need to log in to your account and navigate to the payments section. From there, you specify the payment amount and add the recipient’s bank account information.
Alternatives to ACH payments
If you don’t want to use ACH payments or you’ve reached your bank’s transfer limit, there are several other options you can consider.
- Peer-to-peer (P2P) payment apps: These apps let you pay others via virtual payments. Some businesses might also accept payment through these apps. P2P payment apps may come with fees.
- Personal or business credit cards: Using credit cards lets you make online payments without immediately withdrawing funds from your bank account. Be aware that carrying a balance might mean paying interest.
- Wire transfers: Performing a wire transfer offers a faster electronic payment option. Keep in mind, wire transfers generally come with fees.
Set up ACH payments for your business with Citi
ACH payments offer a simple and reliable way to send and receive money. Whether you’re paying bills, getting paid or sending money to a vendor, they can help keep your business moving. While alternatives make sense in some situations, like when payments must be expedited, ACH payments are typically a convenient choice for both individuals and businesses.
Having fast and reliable ACH transfers for accounts receivable and payable can help streamline your daily operations. Citi offers cash management services that provide ACH origination and receivables alongside other payment solutions. You could automate your high-volume receivables and schedule payments up to 14 days in advance.
Explore Citi’s cash management services today and discover more ways to help optimize your business cash flow.
ACH payment FAQs
Do banks charge businesses for ACH payments?
Yes, banks might charge businesses a small fee to process ACH payments. The exact cost depends on your financial institution and your specific account type.
How long does an ACH transfer take?
An ACH transfer typically takes 1 to 3 business days to clear. The exact timeline depends on whether it’s a debit or credit and the time of day the transfer is initiated. Some financial institutions, including Citi, offer same-day ACH processing for specific transaction types.
How do I know if my ACH transfer went through?
You can verify the status of an ACH transfer by checking your online business banking dashboard. The transaction will appear in your account history once the funds are successfully withdrawn or deposited. You might also receive a notification from your bank if you have account alerts enabled.
What is the difference between an ACH transfer and a wire transfer?
An ACH transfer uses the Automated Clearing House network and settles in batches. A wire transfer uses a different network to move money directly between banks, which often allows for faster or immediate delivery. Wire transfers usually cost more than ACH transfers and are typically used for high-value transactions.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.