Bookkeeping 101: What’s ACH withdrawal?

ACH bank transfers are a great way for small businesses to simplify their payments. But, that doesn’t mean they can’t be a little confusing when you try to make heads and tails of the various financial terms that relate to them. 

In previous articles, we talked about the difference between ACH and SWIFT, compared the safety of ACH to that of other popular payment methods, and explained how ACH differs from a wire. 

Today, we’ll explain everything you need to know about ACH withdrawal. But, first, let’s quickly talk about ACH in general. 

What’s ACH? 

ACH stands for automated clearing house and is a network that enables the safe transfer of funds between accounts. The network is comprised of member financial institutions (aka clearing houses) and is governed by Nacha, which ensures its compliance and security. 

In the third quarter of 2022 alone, the ACH network processed 7.6 billion payments, valued at $19.2 trillion. During the same period, the value of business-to-business (B2B) ACH transactions rose 11.5% year over year to $1.5 billion. 

Thanks to its cost-effectiveness and the fact that it can be done entirely online, ACH is among the most popular options for domestic transfers within the U.S., Puerto Rico, and the Virgin Islands. While ACH can now also be used for international transactions, it is not yet supported by all banks, making it less accessible for this purpose. 

So, what’s ACH withdrawal?

Say you went to dinner with a friend who left their wallet at home and ended up covering the bill. The friend now has several ways to pay you back:

• They can send you a payment via a mobile app or bank transfer. 
• They may hand you cash.
• They could also buy you dinner next time.
• Or, if you’re really close and trust each other, they can tell you to reach into their purse and take the appropriate amount.

That last option is much like an ACH withdrawal. It is a type of payment where the payor gives the recipient (whom they know and trust) permission to withdraw money directly from their account to cover any debt. 

How does it work? 

There are three main steps required to complete an ACH withdrawal: 

1. Authorization: The payor authorizes the recipient to withdraw funds owed directly from their account.  
2. Withdrawal request: The recipient of the payment sends a withdrawal request for the open balance to the payor’s bank through the ACH network. 
3. Processing: The bank approves and processes the ACH payment.

You’ve probably used ACH withdrawal as a consumer without even knowing it, for example, if you set up a mobile payment app using your bank account. In many of these apps, validating the account means you’re giving the app authorization to withdraw funds in correlation with the payments you make. 

So, if you’re sending $5 to the friend who paid for your latte, the payment app sends a withdrawal request for the sum of $5 to your bank. The bank then processes the payment to the app through the ACH network. Once it has the money, the app sends it to your friend, typically within 1-3 business days.  

When is ACH withdrawal used for B2B transactions?  

For businesses, ACH withdrawal is convenient for recurring payments to vendors with whom they have an ongoing relationship. It’s especially useful when you’re paying the same vendor periodically but the amount varies each time. 

Using ACH withdrawal allows your vendor to automatically charge you with the up-to-date sum each month with no additional action on your part. 

Examples of business bills that are often paid with ACH withdrawal: 

• Utility bills
• An accounting firm’s billable hours
• Recurring purchases, such as produce, office supplies, paper products, etc. 

What else is ACH withdrawal called?

ACH withdrawal is also known as ACH debit and direct ACH payment.

What’s that other type of ACH transfer?

There are two main types of ACH bank transfers: ACH withdrawal and ACH credit. ACH credit works just like a regular bank transfer. It’s initiated by a payor sending a single payment directly to a recipient’s bank account. 

ACH credit is the most common kind of ACH, and it’s also the kind used by Melio and other digital accounts payable tools.

ACH credit is used for various payments, from social benefits sent to citizens by the government to payments to vendors for goods and services. A form of ACH credit known as a direct deposit is frequently used by employers to pay salaries. 

Want to learn more about ACH? 

Check out our ultimate guide to ACH.

Is there an easy way to send ACH payments online?

So glad you asked. Yes, there is. And the best part is it’s also free. Take a few minutes to sign up for Melio and start paying your business bills with ACH today. There are no additional fees for standard transfers and no monthly subscriptions. It’s just a better way to do business, and it’s only several clicks away.