How Does an ACH Transfer Work? (2024)

Small BusinessPaymentsPayment Processing

As more people move away from traditional payment methods like cash and checks, businesses are looking for electronic ways to make and accept payments. As a popular way to move money digitally, ACH transfers are generally at the top of the list.

ACH (Automated Clearing House) transfers are electronic money transfers that let you move money between bank accounts. This enables businesses or people to send money to each other without having to deposit the money into a third-party service first.

Whether your business is looking for an easy way to pay vendors or simply move money between accounts, understanding how ACH transfers work is essential.

Here's how:

1. To send an ACH transfer, you'll need the account information of where you want to send the money. Once you have that, you'll submit the payment through your online banking portal or PayPal.
2. Once submitted, your bank (known as the originating depository financial institution) will send the ACH payment information to the ACH network operator. The money will show up as debited from your account.
3. The ACH network operator routes the payment to the recipient's bank (known as the receiving depository financial institution). Once they process the payment, the funds will show up in the recipient's account.

Examples of an ACH transfer

ACH transfers are convenient, fast, and versatile, making them a preferred alternative to writing a check. And there are many ways a business may leverage this payment method.

The most common examples of ACH payment transfers are:

• Direct deposit of payroll into an employee's account
• Split deposit of payroll between the employee's bank account and IRA account
• Direct payment to vendors

An example of an ACH payment can be found across almost every business interaction. A business owner can pay their supplier invoices, send employee payroll, fund employee retirement accounts, issue refunds to customers, pay taxes, and make donations to nonprofit charitable partners, all by using direct payment ACH transfers.

How do ACH transfers differ from debit and credit card transactions?

ACH transfers is processed through the Automated Clearing House network, which is only used to transfer money from bank to bank. While debit and credit card payments are also electronic, they use different payment networks managed by companies like Visa, Mastercard, and American Express.

Because the ACH network sends payments out in batches, it can often take longer for a payment to move from one bank to another. Credit card transactions, on the other hand, are usually processed in seconds.

One advantage of ACH transfers is they require authorization between your bank and the receiving bank. This can help reduce the chances of chargebacks arising from a customer disputing a transaction and demanding a refund.

How much does an ACH transfer cost for small businesses?

ACH transfers tend to cost less than other payment transfer methods, which is one reason why it's one of the more popular payment transfer methods for small businesses.

At some banks, ACH transfers are free. Others may charge a flat rate per transfer, ranging from $.25 to $3.

How long does an ACH transfer take?

Because ACH transfers are usually processed, sent, and received in bulk on a predetermined schedule throughout the day, the time it takes to complete a transaction will vary depending on the time and day the payment was initiated, which banks are involved in the transfer, and if any errors occur.

That said, ACH transfers usually take about one to four business days to complete, which is similar to the time it takes to process a check after it's been deposited. Some financial institutions offer expedited processing of ACH transfers, which may require an extra fee.

What is the difference between an ACH vs wire transfer?

A wire transfer is another way to move money electronically from one bank to another. The main difference is that a wire transfer is a direct transfer between two financial institutions, while an ACH transfer moves the money through the ACH network.

Because a wire transfer is direct, it can be cleared within minutes, making it the better way to send money fast. However, wire transfers can be costly, with banks charging both the sender and the recipient. Fees can range from $0 to $50, which can add up if you regularly transfer funds.

Alternatives to an ACH transfer

While ACH transfers are often the right tool for the job, keep in mind that there are other ways to send money that may be faster or more cost-effective, including:

• Instant transfer apps like PayPal that let you send and receive money
• Legacy money transfer services like Western Union
• Paper checks
• Money orders

Learn other ways to accept payments.

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