The Green Sheet Online Edition

May 23, 2016 • Issue 16:05:02

Are automatic electronic loan payments right for my customers?

By Ty Kiisel
OnDeck Capital Inc.

An electronic payment, or automated clearing house (ACH) debit transfer, occurs when your customers explicitly allow third parties (vendors, merchants or lenders) direct access to their business checking accounts to withdraw agreed upon funds. Roughly 90 percent of all electronic payments are handled through the ACH network and include direct payroll deposits as well as electronic payments.

Many lenders, including online lenders, accept payments this way. For example, an ACH, or electronic small business loan payment works similarly to a home mortgage or automobile loan that is pulled directly from a checking account every month.

Is this a good practice for my customers?

A daily or weekly ACH loan payment makes sense for lenders because it reduces the costs associated with processing a loan payment, ensures the periodic payments are made in a timely fashion, and makes it possible for a lender to identify potential repayment issues within a day or two, rather than several weeks ‒ giving them enough time to help borrowers get back on sound financial footing and meet their commitments.

It can also make sense for borrowers ‒ and could even make sense for your customers. Some of the benefits to business owners include the convenience and cost savings derived from not having to procure, write and mail checks. This is particularly true if the ACH debits are scheduled and automatic.

Because it can facilitate regular and timely payments, this type of payment may also help build a strong business credit profile (assuming sufficient funds are maintained in the primary account). The most important thing a business owner can do to build a strong business credit profile is to meet credit obligations on time. It doesn't take an automatic electronic debit to do that, but the automatic payment does help prevent inadvertently missing payments.

It's not uncommon for online lenders who accept payments this way to require daily or weekly debits as opposed to monthly payments. This is true for many short-term lenders who offer terms from six to 24 months. More frequent, periodic payments are typically smaller than one monthly payment, making it easier for many borrowers to ease their cash flow by avoiding large expenses due at the end of the month.

Financial consulting firm Oliver Wyman Group suggested the "use of a daily remittance model helps smooth the cash flow impact of the new loan for the [small business]; after all, monthly remittance introduces yet another cash flow 'lumpiness.'"

One of the biggest advantages to this type of loan and electronic payments is that it may make capital available to some borrowers who would not qualify within a more traditional repayment model.

How can I help my customers manage ACH business loan payments?

Although millions of ACH transactions happen every day, it doesn't mean much if it isn't going to work for your business or your customers. Here are three things you and your customers can do to make sure it does. Make sure they:

1. Have the right kind of cash flow: If most of an enterprise's revenue is attributed to a handful of customers that make payments at the end of the month, a daily or weekly ACH pull from the business's checking account might not work and may disqualify the customer from some loan types. This is one reason some lenders want to see the last three or four months of business bank statements. They want to ensure that your customers have consistent cash flow throughout the month that can support the daily or weekly debit.
2. Know how much will be debited with each payment: A fixed payment may be easier to budget for. Your customers will also want to know if the debits are made every day, or only on business days. The more they understand about the process upfront, the better they will be able to budget and prepare for each payment.
3. Know what will happen if they don't have enough in the account to make the payment: Nobody wants to see this happen, if it does occur, what does that mean for the loan? Making sure your customers understand the importance of always keeping enough in their accounts to make the automatic withdrawals is critical.

   However, there are times when a business owner might find himself or herself falling short. Usually, they will know ahead of time if they're going to have trouble. When this situation arises, encourage them to let the lender know before the payment is attempted so they can make other arrangements. Missed payments could negatively impact a business's credit profile.

An ACH payment is an innovation designed to make small business loan payments seamless and easy for both the borrower and the lender ‒ and something I think more traditional lenders have and will continue to embrace over time. It's important to understand how they work and what you can do to make them work for you and your customers.

Ty Kiisel is a contributing author focusing on small business financing at OnDeck Capital Inc., a technology company solving the biggest challenge small businesses face: access to capital. With over 25 years of experience in the trenches of small business, Ty shares personal experiences and valuable tips to help small business owners become more financially responsible. Contact him at tkiisel@ondeck.com. You can also reach OnDeck at www.ondeck.com, on Facebook at www.facebook.com/ondeckcapital and through the Twitter moniker @OnDeckCapital.

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