What is ACH Authorization?
Learn what ACH authorization is, how automatic loan payments work, and what to understand about ACH agreements before signing loan documents.
ACH (Automated Clearing House) authorization is permission you give a lender to withdraw loan payments directly from your bank account. Most business loans require ACH authorization, allowing the lender to automatically debit your account for scheduled payments.
How ACH Payments Work
When you authorize ACH payments:
- You provide bank details: Account and routing numbers from your business checking account
- You sign authorization: A form permitting the lender to initiate debits
- Lender initiates transfers: On payment dates, they pull funds from your account
- Funds are transferred: Typically takes 1-3 business days to process
Payment Frequencies
ACH payments can be scheduled at different intervals:
- Monthly: Traditional term loans and SBA loans typically debit monthly
- Weekly: Some online lenders require weekly payments
- Daily: MCAs and some short-term loans debit every business day
Daily Debits
Daily ACH debits (common with MCAs) can strain your cash flow. A $500 daily payment means $2,500 leaves your account each week. Make sure your daily deposits consistently exceed your daily withdrawals.
What to Review Before Signing
Before authorizing ACH, understand:
- Payment amount: Fixed amount or variable (percentage of deposits)
- Payment frequency: How often debits will occur
- Start date: When payments begin
- Insufficient funds handling: What happens if your account is short
- Fees: NSF fees, returned payment fees, late fees
- Revocation process: How to cancel if you pay off or refinance
ACH and MCAs
Merchant cash advances often use a specific type of ACH called "split funding" or "lockbox" arrangements:
- Fixed ACH: A set dollar amount debited daily or weekly
- Split funding: A percentage of each day's deposits is automatically diverted
- Variable ACH: Daily debit amount changes based on a formula
Protecting Your Account
To manage ACH payment risk:
- Maintain adequate balances to cover scheduled debits
- Track payment dates and ensure funds are available
- Set up low balance alerts with your bank
- Keep records of all ACH authorizations you have signed
- Understand that NSF/returned payment fees can compound quickly
If you refinance or pay off a loan, formally revoke the ACH authorization in writing. Otherwise, the lender technically still has permission to debit your account.
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Read more →Important Disclosure
Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
No Guarantee of Financing: Liminal Lending Co. is a business loan marketplace that connects borrowers with third-party lenders. We are not a lender and do not make credit decisions. Submitting an application does not guarantee approval or funding. Loan terms, rates, and availability vary by lender and are subject to borrower qualifications and lender criteria.
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Rate Information: Rates, terms, and fees mentioned in this article are estimates based on publicly available information and may not reflect current market conditions or specific lender offers. Actual rates depend on creditworthiness, business financials, and lender policies.
Information May Change: Financial markets, lending regulations, and economic conditions are subject to rapid change. While we strive to keep our content accurate and up-to-date, information in this article may become outdated. Always verify current rates, terms, program availability, and regulatory requirements with lenders and official sources before making financial decisions.