Both ACH and wire transfers are popular methods to complete electronic money transfers. Though these two payment methods often get confused with one another, some subtle differences in how they work may help decide which one to use in a given situation.
Choosing the right payment method to complete business payments can have a big impact on the bottom line, especially during construction projects. The manual work to set up and reconcile payments, the speed at which they are processed, and the associated costs can all impact a construction project's cash flow and margins.
This article will discuss the key differences between ACH bank transfers and wire transfers, and point out some of the advantages and disadvantages of using each for construction payments.
What is an ACH transfer?
An ACH bank transfer is an electronic money transfer from one financial institution to another through the Automated Clearing House network.
Even those unfamiliar with the Automated Clearing House (ACH) have likely used it in their daily lives. This system, which often goes by the names direct deposit or direct debit, powers automatic bill payments and paycheck deposits. ACH technology also powers peer-to-peer transfers like Venmo, Zelle, and PayPal.
ACH payments may clear quite quickly, but the way they're processed sometimes takes several business days to complete.
How ACH transfers work
When a bank initiates an ACH transfer, it is bundled with other transfers to be processed through the ACH network together to the receiving bank, which completes the ach debit or credit transaction. Clearinghouse network bundles are cleared six times per day. Depending on when the user initiates the bank transfer, the transaction may seem extremely fast.
A successful transfer through ACH requires sufficient funds in the sending account to cover the transfer, or else the transfer will be cancelled and may incur a fee.
Advantages of using ACH for construction payments
For the purposes of construction payments, contractors and owners are looking for speed, security, and cost-effectiveness. Let's see the advantages of ACH transactions to deliver.
Simplicity
ACH transfers can be initiated through users' banks or credit unions, for which you would need the recipient's routing information. However, ACH can get even easier than that – using Truss, the sender only needs to input the recipient's email address to start the transfer process.
When sending money is this straightforward, it's easier to keep cash flows moving for successful construction projects.
Security
Fraud is always a concern when it comes to the movement of money. However, ACH transfers are traditionally less susceptible to fraud because they are federally regulated and may be reversible in the case of error or fraud.
Transfers through Truss are with encryption, and Truss works with trusted providers for the utmost peace of mind.
Cost
The cost for each wire transfer generally runs about $35, but there are no federally imposed limits on what banks can charge. By contrast, ACH transfers are often very low-cost or even free.
That doesn't mean ACH transfers don’t incur some costs. If it happens the sender's account doesn't have enough to complete the transfer, banks may charge $30-$35 in NSF charges. Contractors can avoid all those fees by processing their accounts payable through Truss, which offers free ACH transactions and a nifty NSF feature that helps ensure there's enough cash in the account to avoid NSF charges.
Limitations of ACH for construction transactions
While ACH is a commonly used system for transferring funds in the US, there are some drawbacks to using the network for making payments in the construction industry.
Speed
Whereas wire transfers may happen almost instantly, ACH payments can take a few business days to complete. Users who send funds on eligible days can pay an additional fee to complete same-day ACH transfers. Most other ACH transfers will settle the following business day, depending on the time of day the transfer was initiated.
Truss allows account holders to access transferred funds as soon as the sender completes the transaction, removing the time barrier to keep cash flowing and construction projects moving.
Transparency and tracking
Because ACH transfers move through the network in bundles, and because they're protected by internal controls in an attempt to quash fraudulent transfers of cash, there may be some delay in processing. Meanwhile, recipients hang in the balance as the transfer appears as "pending" in their accounts, with little indication of what's happening or when the funds will clear.
By using Truss, senders and recipients get total visibility throughout the payment transfer. Both can access real-time tracking of funds, along with an estimated deposit date so they can stop guessing and take better control of their finances.
What is a wire transfer?
Like ACH, a wire transfer is an electronic funds transfer that move money between bank accounts. Unlike ACH transfers, which use a network of intermediaries, domestic wire transfer payments move directly from one institution to another. Wire transfers are often immediate, and because the transfer limit is very high, they're often used for large, one-time purchases.
How do wire transfers work?
Whereas ACH transfers move through the clearinghouse network, wire transfers involve direct communication between the sender's and recipient's financial institutions. The sender provides the initiating bank with the recipient's name, bank account number, phone number and address, and the financial institution receiving the transfer.
The benefits of wire transfers in construction
For large and one-time payouts, wire transfers can offer speed and transparency for contractors.
Speed
Wire transfers are speedier than most other methods of payment. Senders may choose to transfer funds through Fedwire, the Federal Reserve Bank service, or the Clearing House Interbank Payments System (CHIPS) to send the wire. Fedwire transfers typically clear immediately after the recipient's financial institution confirms receipt of the funds, while CHIPS transfers may clear within a few hours or on the following business day.
Owners and contractors may find wire payments very helpful for large, one-time expenses or urgent payments where time is tight, like on large deposits.
Traceability
Because wire transfers travel a direct route from one bank to another, there's much more predictability as to the status of the funds and how long it will take them to clear.
The challenges of using wire transfers in construction
Users can't set up recurring wire transfers, so each wire transfer has to be done separately. Individual manual setup, combined with the cost and security concerns, can detract from the usefulness of wire transfers for day-to-day transactions.
Security
The downside to such speedy funds clearance is that there's less time to allow for checks and balances to eliminate fraudulent activity and recall funds. Wire transfers can only be cancelled until they're cleared, which we've learned can be very quickly. After clearance, the funds are generally irrevocable unless the sender can prove they've sent an incorrect amount or to the wrong account.
Tedious setup
Wire transfers require a full complement of information about both sender and recipient to get the funds moving. In addition to name, account details, address, phone number, and the recipient's bank name, the sender has to figure out the recipient's routing number to get the money moving. This process is finicky, and it's easy to make a mistake.
Contractors send payments to subcontractors, materials suppliers, equipment rental companies, and numerous other vendors throughout a construction project. It would be impractical to find all this detailed information anytime the contractor wanted to send funds.
Cost
Wire transfers incur a wire transfer fee for each wire payment sent. The amount each wire transfer will cost depends on the financial institution and the speed of the transfer, but domestic wire transfer fees may range from $10-$35 each. Contractors concerned about bottom-line costs will want to avoid these extra fees except in very specific, circumstances and for one-time payments.
When to use ACH or wires for construction business owners
Wire transfers are quick but costly, and ACH transfers are convenient but can leave the recipient hanging for longer. So, which is ultimately the best solution for making construction payments?
Although there can be a viable use case for both wire transfers and ACH transfers throughout a construction process, there are payment solutions that can bridge the gap and offer some of the benefits of both worlds for financial transactions in the construction industry.
Contractors can start sending money for free through Truss using only the recipient's email address to set up the transfer. Both parties can track the payment throughout the process and receive an estimate of when the funds will settle. If the recipient has a Truss account, they may be able to access funds immediately after the sender confirms the transfer. Finally, the whole process is covered with bank-level security through Truss.
Contractors depend on reliable access to cash to keep progress moving on construction sites. The fast and efficient movement of money through a solution like Truss can facilitate good cash flow management, avoiding construction delays and damaged business relationships.
