What Is Business to Business ACH and How Does It Work?

Automated Clearing House (ACH) is a central electronic network facilitating financial transactions in the United States. Business to Business (B2B) ACH refers to the use of this network for digital payments between two businesses. It serves as a direct, bank-to-bank transfer method, allowing companies to send and receive funds electronically without paper checks or wire transfers. This system provides an efficient way to manage financial flows between organizations.

Core Concepts of ACH

The ACH network operates under the governance of the National Automated Clearing House Association (NACHA), which establishes the rules and standards for all ACH transactions. This regulatory body ensures consistency and security across the entire payment system. Several key participants interact within this network to facilitate the movement of funds.

The party initiating an ACH transaction, such as a business making a payment, is known as the Originator. The Originator’s bank, responsible for transmitting the payment instructions into the ACH network, is called the Originating Depository Financial Institution (ODFI). Conversely, the business receiving the payment is termed the Receiver.

The bank that receives the payment instructions from the ACH network and credits or debits the Receiver’s account is the Receiving Depository Financial Institution (RDFI). The ACH Network itself, primarily operated by the Federal Reserve and The Clearing House, acts as the central hub. It routes payment instructions between the ODFI and the RDFI, ensuring that funds are directed to the correct accounts.

How B2B ACH Payments Work

A B2B ACH payment begins when the Originator, such as a business paying a vendor, initiates the transaction. This typically occurs through their financial institution’s online banking portal or a specialized treasury management system. The Originator provides payment details and authorizes the transfer.

Once authorized, the ODFI collects these payment instructions, often bundling them into an ACH file containing multiple transactions. This file is then submitted to the ACH Network. The ACH Network sorts and routes each transaction to the appropriate RDFI.

The RDFI receives the transaction data and posts the credit or debit to the Receiver’s bank account. This action makes the funds available to the receiving business. The final step involves the settlement of funds between the ODFI and RDFI, which occurs within one to three business days.

Key B2B ACH Transaction Types

Specific Standard Entry Class (SEC) codes define the nature of B2B ACH transactions and the information they can carry. Corporate Credit or Debit (CCD) is a widely utilized format for business-to-business payments. It supports a single addendum record, which can include up to 80 characters of remittance information, such as an invoice number, making it suitable for single-item payments or recurring invoices.

Corporate Trade Exchange (CTX) offers a more comprehensive solution for B2B transactions requiring extensive data. CTX allows for up to 9,999 addendum records, enabling businesses to include detailed remittance information, often integrated with Electronic Data Interchange (EDI) systems. This makes CTX ideal for large-volume supplier payments that involve matching payments to numerous invoices. Both CCD and CTX can be used for either credit (push) or debit (pull) transactions between businesses.

Information Required for B2B ACH

To initiate a B2B ACH payment, businesses need to gather specific information about the Receiver. This includes the Receiver’s business name, bank account number, and routing number. The payment amount and the effective date of the transaction are also necessary.

For debit transactions, where the Originator pulls funds from the Receiver’s account, obtaining clear authorization from the Receiver is a strict requirement. The Originator must also provide their bank account details and company identification to their ODFI.

Businesses expecting to receive B2B ACH payments must provide their banking details, specifically their bank account number and routing number, to the Originator. They should also provide explicit authorization for any debit transactions initiated against their account. Maintaining accurate and readily available banking information helps ensure smooth and timely receipt of funds.

Executing B2B ACH Payments

Most businesses submit B2B ACH payment instructions through their financial institution’s online banking portal or a dedicated treasury management system. Larger organizations or those processing high volumes of transactions might create and upload an ACH file directly.

Upon submission, businesses should monitor the status of their transactions to ensure successful processing. Reconciliation of payments with corresponding invoices is an ongoing process to maintain accurate financial records. If a payment is returned, businesses need to address the issue promptly.

Common reasons for ACH returns include incorrect account numbers, closed accounts, or insufficient funds. When a return occurs, the financial institution provides a return code indicating the reason for the failure. Businesses should then correct the issue, such as updating banking details, and re-initiate the payment if necessary.