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What’s an ACH withdrawal and how does it work?

The owners of a fashion boutique using a laptop to set up online payments to suppliers.
Tofi Stoler
Published at | Updated:

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

What is 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 2023 alone, the ACH network processed 7.8 billion payments, valued at $19.7 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 signed up for 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 required 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 are the pros and cons of ACH withdrawals for businesses?

We’ve already established ACH withdrawal can be a useful tool in your payment method belt. Still, it’s important to assess the benefits and risks associated with it, before deciding to use it for your business.

Pros of using ACH withdrawal

  • Convenience. Instead of manually sending a payment each month, your vendors can automatically charge you the right amount periodically. You don’t have to do anything. 
  • Price. Unlike wires, ACH transfers are relatively cheap (and sometimes even free), so you’re not spending too much money just to pay the bills.  
  • No maintenance required. Once you set up and authorize an ACH debit to your vendor, the payments can go through regularly according to the terms you agreed upon, unless you decide to cancel the order. ACH withdrawal is done using your bank information, which doesn’t change, so you don’t have to worry about missing a payment if your credit or debit card expires. 
  • No late payments. Since there’s no need to take additional action for the payment to go through, you’re never at risk of accidentally skipping a payment.
  • Safety. The several days it takes for an ACH withdrawal to get processed are an opportunity for you and your bank to catch any fraudulent or erroneous activity and reverse the payment if needed.

Cons of using ACH withdrawal

The main disadvantage of using ACH withdrawal has to do with safety and potential ACH fraud. While ACH is typically a safe payment method and Nacha is constantly working to ensure its safety, there are concerns to take into account when choosing to pay via ACH withdrawal: 

  • Compromised credentials. As with all ACH transactions, ACH withdrawal requires you to provide your vendor with your bank account number and routing number. If these credentials get into the wrong hands, they can be used to facilitate ACH fraud.
  • Breach of trust. When you authorize an ACH withdrawal, you’re essentially giving your vendor permission to extract money from your account. This freedom can be misused if you’re not careful. 

To avoid fraudulent charges, you should only share your bank information with and authorize ACH withdrawals to reliable vendors you have an ongoing and trusting relationship with. You should also go over your charges periodically to make sure you detect anything out of the ordinary in time to reverse the payment.

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, read about the difference between ACH and SWIFT, the safety of ACH compared to that of other popular payment methods, or how ACH differs from a wire.

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.

*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.