ACH transfers are a reliable, inexpensive, and safe method for businesses to send and receive payments. To ensure their safety, they are overseen by nonprofit organization NACHA (the National Automated Clearing House Association), which regulates the whole process in collaboration with government agencies, including the Federal Reserve, U.S. Treasury, and state banking authorities.
As a form of electronic funds transfer (EFT), ACH (Automated Clearing House) payments can be made online in just a few simple steps, which helps businesses save time on managing accounts payable. Many people, however, tend to get confused by the different types of ACH payments and remain reluctant to use them.
In this article, we will quickly walk you through the two main types of ACH you may encounter—ACH credit and ACH debit. We will also explain the differences and similarities between them, other common nicknames, and what each is used for. Let’s dive right in so you can start using ACH for your business.
The different types of ACH explained
There are two main types of ACH payments and each of them is used for different purposes: ACH credit and ACH debit. Below, we’ll cover the basic definitions and uses of each.
What is ACH credit?
ACH credit payments are like any other bank transfer. They are initiated by the payor and sent directly to the recipient's bank account.
What types of payments are made via ACH credit?
ACH credit is used for a variety of payments. The government may use it to send social benefits to citizens, for example, while a business can pay for goods and services. A form of ACH credit called direct deposit is often used by employers to pay salaries.
ACH credit is the most common type of ACH for business-to-business (B2B) transactions, and it’s also the type used by Melio and other digital accounts payable tools.
What is ACH debit?
This type of ACH payment is initiated by the recipient of the funds, who submits a payment request to the payor’s bank. Upon the account owner’s approval, which is typically given beforehand, the money is deducted from their account and sent to the requesting party.
What types of payments are made via ACH debit?
ACH debit is typically used for recurring payments, including those that vary in amount from time to time. They are especially convenient for rent and utility bills as the payee can automatically charge the payor with the up-to-date sum each month with no additional action needed.
What are other common names for ACH debit?
ACH debit is often referred to as direct payment or ACH withdrawal.
Learn more about ACH payments
In this post, we really only touched the tip of the iceberg when it comes to ACH. If you want to learn more about ACH payments and how they can help your business, check out our complete guide to ACH payments.
*This blog post is intended for informational purposes only and is not intended as financial advice.
**Melio does not provide legal, tax or accounting advice, and you should consult with a professional advisor before making any financial decisions.