One of the best cash management tools available to businesses is electronic funds transfer, or EFT. As the name implies, EFTs enable businesses and their customers to exchange money between each other electronically instead of via checks or wire transfers.
EFTs are also sometimes referred to as ACH transactions. ACH stands for Automated Clearing House, which is the nationwide electronic payment network that allows the actual clearing of electronic payments and payment-related information between financial institutions. Payment-related information can be sent along with ACH transactions, a process known as electronic data interchange, or EDI.
While you may not have heard the term ACH, you may be familiar with some of the different kinds of electronic payments that can be initiated through the ACH network. These include the following:
- Direct deposit: This is perhaps the most common type of ACH payment. Most companies in the United States today pay their employees via direct deposit instead of paper check. Direct deposit is also used by government entities to make Social Security and other benefit payments and to issue refunds to taxpayers.
- Direct debits and credits: These types of electronic payments can be made from business-to-consumer and from business-to-business. Consumers pay many recurring bills, such as mortgages, utilities, insurance, and health club memberships, via ACH, and many businesses pay their vendors and suppliers via ACH credits instead of paper checks.
- Federal, state, and local taxes: ACH has become a common funds transfer mechanism for the payment of corporate taxes at all levels of government.
The main benefits of making and receiving ACH payments are cost savings and convenience. The alternative, such as moving funds via a wire transfer is expensive: up to $20 or more per wire. If you have planned ahead and have a two- or three-day cushion, the money can be transferred via an ACH debit or credit for less than $1 per transaction.
Meanwhile, most employees have grown accustomed to the convenience of receiving their pay electronically via direct deposit. And employers save money, too, because payroll direct deposit is less expensive than issuing paper paychecks.
Companies that receive ACH payments from customers also enjoy cash-flow advantages because they are assured that payments will be made automatically on the date they’re due rather than having to wait for checks that may or may not be “in the mail.” Utility companies and health clubs were among the first businesses to begin using ACH on a large-scale basis, but smaller firms can enjoy the same cost savings and cash flow benefits.
While many of these same benefits can be accrued by accepting credit cards as an automatic payment method, ACH debits and credits are usually less expensive because they incur a flat fee per transaction instead of a percentage of each transaction amount. The larger the transaction the more expensive accepting a credit card is. Also, bank accounts don’t have expiration dates like credit cards do; and people rarely switch banks, so there’s less risk of bounced ACH transactions.
Using the ACH is also a green alternative to mailing and processing hundreds or even thousands of checks. It reduces the resources used in the creation and transportation of paper checks, including fossil fuels, trees, and water, and limits the amount of greenhouse gasses released into the atmosphere.
Finally, ACH transfers are safe and secure. Since the inception of the ACH nearly 40 years ago, there has not been a single reported instance of an ACH payment being lost.
Don Sadler is a freelance writer and editor specializing in business and finance.