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Paper checks are a hassle for everyone. For an increasing number of small businesses, ACH payments are safer, can get you paid faster, and reduce late payments alternative to paper checks. So, what are ACH payments, how do they work, and how can they benefit your small business?

What are ACH payments?

We’ll start with a definition. ACH payments are electronic funds transfers between bank accounts without using physical debit and credit cards, wire transfers, paper checks, and cash made over the ACH Network.  The ACH network, or Automated Clearing House network managed by NACHA. ACH payments are more commonly known as direct deposit or direct payments and include business-to-business (B2B) transactions, government transactions, and consumer transactions.

ACH payment accounting

How are ACH payments different than wire transfers and EFTs?

While ACH payments and wire transfers are similar in what they do, there are several differences between them. Wire transfers are immediate and processed in real-time. ACH payments typically are batch-processed three times a day. Since wire transfers are processed in real-time, funds are deposited on the same day. On the other hand, ACH payments can take up to several days to process, delaying fund availability. Wire transfers are more expensive than ACH payments, sometimes costing up to $60 – ouch!

Electronic Funds Transfers or EFT payments are the same ACH payments as an ACH payment is a form of EFT.

ACH Payments/EFTs Wire Transfers/Wires
Pros Cost: ACH payments are cheaper than wire transfers Speed: faster don’t use a “batch” process
Cons Speed: ACH payments take 1-3 days to process Cost: High per transaction cost


ACH payment examples

There are two types of ACH payments. ACH debits with money being “pulled” from your account. ACH credits transactions “push” money to different banks. Here are two examples of how ACH debits and Credits work.

Direct deposit payroll

Most companies direct deposit their payroll. An ACH credit pushes the money to their employees’ bank accounts on a recurring schedule.

Recurring bill payments

Consumers who pay a business a pre-determined amount regularly (say, for a car or mortgage loan) can choose to sign up for recurring payments. The consumer gives the business permission to initiate ACH debit on an agreed-upon schedule. The ACH debit takes or pulls the amount owed directly from the customer’s account.

The ACH network

ACH network image

To process an ACH payment, there are three key players in the ACH network you need to be aware of:

  • The Automated Clearing House, or ACH network – the network which includes all U.S. banks.
  • The Originating Depository Financial Institution (ODFI) or the bank initiates the transaction.
  • The Receiving Depository Financial Institution (RDFI) or the bank receives the ACH request.

ACH and Data Entry

To use the ACH network, you will need to create a NACHA file and initiate an ACH Entry. ACH Entry is any electronic funds transfer initiated through the ACH System. .Each ACH Entry needs data to accompany it that describes what happens to the transaction also referred to Data Entry.  The data needs to structured into a NACHA file.

ACH or NACHA file

A NACHA file is the set of instructions that initiates a batch (multiple) of ACH payments.  NACHA mandates a file format that defines the structure of the instructions. While NACHA file details can vary by payment, however, they include text and payment instructions like:

  • Account number
  • Routing number
  • File header and trailer
  • Batch header record with service class code
  • Entry detail record

Many small business accounting programs create NACHA files for uploading to payment portal.

So how do ACH payments work?

Let’s say you subscribe to a video streaming service and want to set up automatic monthly payments. First, you’ll provide the streaming company with your bank account and routing numbers to have the payments pulled monthly from your checking account. Next, sign a recurring payment authorization. Then, the streaming service prepares a NACHA file that includes your payment and many others.

Then every month, the streaming service’s bank (ODFI) sends an ACH request to your bank (RDFI) to transfer the money to the streaming services account with the OFDI. The two banks’ systems communicate, ensuring enough funds are in your bank account to process the transaction.

If your bank account has sufficient funds, the transaction is processed, and the funds are transferred to your streaming services bank account.

ACH payment processing times

man and watch - ACH processing time

According to NACHA guidelines:

ACH Type Processing Time
ACH Credit Within two business days
ACH Debit Within one business day.


It is important to note that RDFIs can hold transactions for an additional one to two business days.

ACH payment cost

ACH payments have a lower processing cost than credit cards. Your payment processor typically sets the prices for ACH payments. If your business is high-risk, you will likely pay more than the typical fees listed below.

Typical ACH Pricing

Pricing Fee per transaction
Flat Fee $0.20 – $1.50
Flat Percentage 0.5% – 1.5%


Some processors may also charge monthly fees for ACH returns, ACH revokes, and ACH web validation (required by NACHA the first time an account is used online).


ACH returns or rejects occur when an ACH entry cannot process. Since ACH transactions are not processed in real-time, they can be returned or rejected after completion.

ACH Revoke is when an ACH user exercises their legal right to cancel their authorization for an ACH payment.

ACH Web Validation is a check performed on an account, required by NACHA the first time an account is used online

Why are some ACH payments rejected or returned?

When an ACH payment is rejected, your bank or OFDI will provide you with a return code. These return codes give your customers the information they need to understand why their payment was rejected. Here are the four most common ACH return or reject codes; you can find a complete list here:

R01 Insufficient funds

The customer didn’t have enough money in their account to cover the amount of the debit entry. When you get this code, you typically rerun the transaction after the customer transfers more money into their account or provides you with different bank account information or the payment method.

R02 Account closed

This code is returned when a customer has an active account and closes it later. Commonly, the customer forgot to inform you about the change, which means they need to provide you with a new bank account to complete the transaction.

R03 No bank account/unable to locate the account

This code is returned when the information the customer gave you, like the name on the account and the account number, doesn’t match the bank’s records or a number for a nonexistent account is entered. So the customer needs to give you their banking information again.

R29 Not authorized by corporate customer

When you see this code, it means a bank is not allowing a business to withdraw funds from a referenced bank account. Typically, you will rerun the transaction after the customer provides your ACH Originator ID to their bank, permitting ACH withdrawals by you.

 ACH payment penalty fees

Your bank or processor will access you for a fee when an ACH payment generates a return code. So, if you have a customer on a recurring plan, you will be charged a fee every time the ACH is presented. So, acting quickly to resolve the issue makes good business sense. For this reason and to avoid ACH return hassles, we recommend only accepting ACH payments from customers you trust.

ACH security

ACH payments are not required to follow credit card PCI compliance guidelines.

NACHA does, however, require that all parties involved in ACH transactions (including businesses initiating the payments and third-party processors) implement processes, procedures, and controls to protect sensitive data. Their rules also stipulate that the transmission of any banking information (like a customer’s account and routing number) be encrypted using “commercially reasonable” technology.

You can’t send or receive bank information via unencrypted email or insecure web forms. Make sure that it has implemented systems with state-of-the-art encryption methods if you use a third party for ACH payment processing.

Under the NACHA rules, originators of ACH payments must also take “commercially reasonable” steps to ensure the validity of customer identity and routing numbers and to identify possible fraudulent activity. Most third-party ACH processors should have these capabilities, but check before you sign on with anyone. It’s also worth working with an IT or security professional to ensure your business processes ACH payments safely.

The small business benefits of ACH payment processing

Here are some reasons why ACH payments are an attractive option for businesses.

Lower processing costs

ACH payments have a lower processing cost than any payment type.

Fewer expiration declines 

Checking accounts don’t have expiration dates like credit and debit cards. So, with ACH payments, you have far fewer declines.

More Secure

ACH payments are more secure than paper checks the transaction is processed on secure networks.

Reduce human error and increase time savings

ACH payments are deposited directly into your business bank account and can be imported into your accounting system, reducing human error and time spent on reconciliations.

More convenient

No more paper invoices, paper checks, payments lost in the mail, and fewer bank trips.

Improves customer relationships

Giving your customers many payment options is always a good idea since it improves customer satisfaction. For example, customers don’t have to remember to send in a payment with ACH payments. Instead, they and you benefit by their signing up for recurring billing.

ACH payment processing drawbacks

ACH payment processing is affordable and convenient, but like any payment system, it isn’t perfect. Here are some of the more common drawbacks:


ACH payments take between one to three business days to process.


There can be daily and monthly caps. The Same Day ACH per transfer limit is a maximum amount of $25,000.

Cutoff times

ACH payments are processed in batches. There are cutoff times when you can submit batches, or the batch won’t be processed until the next business day (or on Monday if it’s before a weekend). Cutoff times vary by processor.

U.S. only

The ACH network does not process international transactions. The ACH network only processes transactions to and from domestic bank accounts.

How to accept ACH payments

A business wanting to use ACH payments needs to use a bank or payment processor set up to process ACH payments.

While the cost per item is a key criterion, business owners should also understand all the costs or fees a processor might charge. Further, a flat fee isn’t always the best option when your payment volume is small. But, at the same time, it might make sense at higher payment volumes.

Another area to evaluate is done you through your accounting software or does your processor have an easy-to-use process for creating and uploading NACHA files and batches.

IntelliPay, the sponsor of this article, makes ACH payment processing easy. To get started, call 855-872-6632 option three, or email sales at