What is Business to Business ACH and How Does It Work?
No matter the industry, any company will have significant dealings with other businesses. Whether that is procuring goods or services from a supplier, or working with utility providers, business to business (B2B) transactions are a significant part of daily operations.
When it comes to paying these other businesses, many small businesses still use paper checks or card payments to purchase merchandise and supplies and to pay recurring bills. Though this gets the job done, there is another payment processing option small, medium and growing businesses should consider for their business to business transactions–ACH payments.
We often write about ACH payments and how it can save time and money and is a useful way to ensure recurring billing happens smoothly. Additionally, Automated Clearing House (ACH) payments are likely already in use if your business, in the form of direct deposit payroll.
That being said, while ACH payments certainly make things like customer subscriptions and bill pay easier, it’s worth noting that this payment method is also used in B2B settings. In fact, ACH payments can be massively beneficial given the high transaction values between businesses.
In this post, we’ll take a closer look at business to business ACH transfers. We’ll shed light on how they work and cover the basics of how your business can benefit from B2B ACH payments.Learn More
What is Business to Business ACH?
We can break down business to business ACH payments into two categories:
ACH credits, which are funds added to the bank account of the recipient; and ACH debits, which are funds debited from the originator, or business that is making the payment.
These transactions are processed through the Automated Clearing House Network in the same way as business-to-customer transactions.
How Does B2B ACH Work?
There are four steps in business to business ACH transactions: authorization, transaction initiation, payment request, and payment processing.
These transactions are processed as follows:
- In the authorization stage, the transaction originator fills out a form authorizing the funds to be debited from their bank account. This form requires the payee to input their bank account number and routing number, along with other payment details.
In a B2B context, this could mean sending a business client an authorization form or a link to a portal where they can enter their banking information. Let’s say you’re a law firm that recently landed a corporate account.
You would need to interface with the company’s Accounts Payable department and ask them to provide the necessary info so you can initiate B2B ACH transactions.
- Next is transaction initiation, where the receiver sends the payment and banking information to the ACH provider or financial institution. This is known as the ODFI, or Originating Depository Financial Institution.
Let’s go back to the above example: when it’s time to initiate an ACH payment, the law firm transmits an ACH debit request to its bank, which is considered the OFDI.
- Then, the payment request is sent from the ODFI to the transaction payee’s bank, which is known as the RDFI or Receiving Depository Financial Institution.
In our example, the OFDI communicates with the RFID (the client’s financial institution) to pull the funds.
- Finally, the payment processing stage is where the RDFI confirms that sufficient funds are present in the originator’s account and proceeds to process the transaction.
Benefits of ACH Payments Over Credit Cards And Other Payments
There are several benefits of ACH payments, chief among them being faster delivery compared to a paper check, and lower credit card processing fees—both resulting in a cost-effective, faster payment option for businesses.
For businesses paying bills or ordering supplies and merchandise via paper check, processing times are much longer than with an ACH payment. Some ACH payments process the same day or within 1-2 business days.
This speed is important, particularly for businesses that want to be more agile. When you need to make fast decisions and get deals moving quickly, the rapid delivery of funds is a must.
There’s also the matter of processing costs. Transaction values are typically higher in the business realm, as companies tend to order higher volumes of merchandise and are more likely to purchase high-ticket services (e.g., consulting work, legal services, etc.).
Payment processing comes with a cost, but the good news is that the expenses that come with processing ACH payments are typically lower compared to methods like credit cards. (More on this below.)
Lastly, ACH payments can help B2B companies serve clients better, given the increasing popularity of the payment method. According to the National Automated Clearing House Association (NACHA), the organization governing ACH payments, there are an average of 1.4 million ACH transfers every day, a clear indication that check payments are no longer a popular payment method.
Costs Associated with Accepting ACH Payments
ACH transactions avoid the interchange rates associated with credit card payments and the high cost of wire transfers and are a less expensive option for your business. Most businesses pay just 1% per transaction (no matter the size) with a cap of $10. With Stax, ACH transactions cost $.29 on average and are ideal for high-value transactions.
Processing fees are much higher for credit and debit card transactions, and depending on the payment processor, can often be a percentage of the transaction amount. For a business making B2B purchases, often of a higher amount than a consumer transaction, these fees can really add up.
For businesses looking to implement business to business ACH payments, other benefits include ease of setting up recurring payments and a secure manner to process transactions. Many B2B transactions happen on a recurring basis, and with ACH payments in place, the headache of re-entering card information or updating the expiration date is a thing of the past.
ACH transactions are also notably more secure than other payment options; an estimated 75% of businesses have experienced check fraud—conversely, ACH payments are consistently ranked as one of the safest payment methods.
Disadvantages of Business to Business ACH Transactions
There is a clear business case for ACH transactions for B2B transactions. Frankly, there are very few actual “disadvantages” of offering this as an option for B2B transactions you accept and utilizing ACH transfers for remitting payments to other businesses.
One potential drawback is that not all businesses will accept and send payments through the ACH network, so consistent and universal adoption may be some time away. That said, it is still advisable to use this for billing and paying other businesses when possible. Your payment processor should have several payment methods available to your business if the receiving business does not accept ACH transfers.
How Can Your Business Implement ACH Processing?
To start remitting and receiving payments through the ACH network, choose a payment processor that can accept all forms of payment and integrate seamlessly into your business. There are many options out there when it comes to payment processing, so it’s important to choose a partner that can meet your current and future needs.
Stax is a subscription-based payment platform and can save your business time and hassle by accepting all payment types. With helpful resources and in-depth information, Stax can help you expand your payment processing options to include business-to-customer and business to business ACH transfers.
With Stax, business owners benefit from lower transaction fees and transparent pricing. Helpful dashboards help streamline your business operations and best-in-class technology allows you to process all payments easily and efficiently.
Accepting business to business ACH transfers is just one of the many ways Stax can help modernize, secure and grow your business. With award-winning, 24/7 customer support, we’ve got your back.
Contact us today to learn more.Request a Quote