Last editedJul 20223 min read
Is a direct bank transfer payment method good for small businesses?
It’s one of the first considerations for any small business owner: how are you going to get paid? While some opt for cash and others for cards, another option is the direct bank transfer payment method. Keep reading for a closer look at direct bank transfer payment methods along with their pros and cons, so that you can decide if this option could work for you.
What is a bank transfer payment method?
A direct transfer is a type of bank-to-bank payment that moves money from one account to another. This is usually done online, but it can also be initiated over the phone or by physically visiting a bank branch. In most cases, these payments are initiated by the customer in response to an invoice sent by the business.
Bank transfers within the US are usually sent using the ACH, or Automated Clearing House, system. This breaks down into two main categories of payment:
ACH Debits are pull payments, allowing the business to pull the money directly from a customer’s account.
ACH Credits are push payments, controlled and initiated by the payer rather than the merchant.
The direct bank transfer payment method is initiated by the payer for one-off transactions on an individual basis, making it an ACH credit transfer. Wire transfers are another direct transfer method, sending money from the payer’s bank account to the payee’s account.
Any bank transfer requires some basic information, including the appropriate routing and account numbers.
What are the processing times for the bank transfer payment method?
Processing times will vary depending on whether you’re sending an ACH payment or wire transfer. Domestic wire transfers sent within the United States are typically turned around within one day, making them a good option if you need rapid settlement. However, the customer pays a hefty fee for sending this type of transfer.
By contrast, ACH bank transfers typically take between two and three business days – although it can take up to six days for the payment to be fully submitted and received. Those who wish to use this direct transfer method can pay a little extra for an expedited same-day service on par with wire transfers, provided the transfer is under $1 million.
Pros and cons of a bank transfer payment method
For businesses, there are several advantages and disadvantages associated with bank transfer payment methods.
One of the main benefits of the direct bank transfer payment method is a high level of security. By nature, ACH and wire transfers use multiple layers of security for processing. Financial institutions handling these requests encrypt all banking information. There are also steps taken by the bank to verify identity and banking details to prevent fraud.
On the other hand, there are some downsides to direct bank transfer payment methods.
1. The small business has no control or visibility.
Direct transfers require the customer to initiate payment. Even when you send an invoice on time, there’s no guarantee that it will be paid by bank transfer on the appropriate due date. There’s also no visibility regarding payment status. Instead, the small business needs to communicate with the customer for updates.
2. Bank transfers can lead to late or failed payments.
With payment initiation firmly in the hands of the customer, there can be errors or delays. According to astudy from the UK, small and medium enterprises were paid an average of 18 days late. This in turn takes a toll on company cash flow, something that’s common for US small business owners. In fact,69% report being kept up at night with cash flow worries.
3. Increased admin and paperwork.
In theory, direct bank transfers should take the work out of getting paid. In an ideal world, you send an invoice and it’s paid on time. However, when payments are delayed or paid in incorrect amounts, it simply adds on to your business workload.
Is a direct bank transfer payment method right for your small business?
There are some benefits to ACH credits and wire transfers, but bank transfer payment methods like these aren’t always the best fit for time and cash-strapped small businesses. No matter the payment method you choose, be sure to compare transfer times, fees, and transfer limits carefully.
ACH debit payments offer all of the same benefits of other types of direct bank transfers, but they put the merchant in control. The customer only needs to authorize payment the first time, after which the business can pull payments directly from their bank account as they’re due. This is not only more efficient for the customer, but significantly reduces hassle for the business owner. GoCardless enables pull-based debit payments while also partnering with key accounting software likeXero and Salesforce. This lets you keep tabs on payments every step of the way, reducing all uncertainty.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.
