What Is the Automated Clearing House (ACH)?

The Automated Clearing House (ACH) is an electronic funds-transfer system run by Nacha. The Automated Clearing House traces its roots back to the late 1960s but was officially established in the mid-1970s. The payment system provides many types of ACH transactions, such as payroll deposits. It requires a debit or credit from the originator and a credit or debit on the recipient’s end.

How the Automated Clearing House (ACH) Works

The ACH Network is an electronic system that serves financial institutions to facilitate financial transactions in the U.S. It represents more than 10,000 financial institutions and ACH transactions totaled more than $72.6 trillion in 2021 by enabling over 29 billion electronic financial transactions.

The network essentially acts as a financial hub and helps people and organizations move money from one bank account to another. ACH transactions consist of deposits and payments, including:

Here’s how the system works. An originator starts a direct deposit or direct payment transaction using the ACH network via debit and credit. The originator’s bank, also known as the originating depository financial institution, takes the ACH transaction and batches it together with other ACH transactions to be sent out at regular times throughout the day.

An ACH operator, either the Federal Reserve or a clearinghouse, receives the batch of ACH transactions from the originating institution with the originator’s transaction. The ACH operator sorts the batch and makes transactions available to the bank or financial institution of the intended recipient, also known as the receiving depository financial institution. The recipient’s bank account receives the transaction, thus reconciling both accounts and ending the process.

Special Considerations

The ACH payment system is offered by Nacha. Formerly known as the National Automated Clearing House Association, it’s a self-regulating institution. The ACH network’s history dates back to 1968 but wasn’t officially established until 1974.

This network manages, develops, and administers the rules surrounding electronic payments. The organization’s operating rules are designed to facilitate growth in the size and scope of electronic payments within the network.

Advantages and Disadvantages of the ACH

Advantages

Because the ACH Network batches financial transactions together and processes them at specific intervals throughout the day, it makes online transactions extremely fast and easy. NACHA rules state that the average ACH debit transaction settles within one business day, and the average ACH credit transaction settles within one to two business days.

The use of the ACH network to facilitate electronic transfers of money has also increased the efficiency and timeliness of government and business transactions. More recently, ACH transfers have made it easier and cheaper for individuals to send money to each other directly from their bank accounts by direct deposit transfer or e-check.

ACH for individual banking services typically took two or three business days for monies to clear, but starting in 2016, NACHA rolled out in three phases for same-day ACH settlement. Phase 3, which launched in March 2018, requires RDFIs to make same-day ACH credit and debit transactions available to the receiver for withdrawal no later than 5 p.m. in the RDFI’s local time on the settlement date of the transaction, subject to the right of return under NACHA rules.

Disadvantages

Certain financial institutions may restrict the amount of money you can transfer. If you want to do a large transfer, you may have to do this in multiple steps. For instance, if you’re transferring money to your child who’s away in college, you may be limited to transfers of $1,000. If they need more for books and rent, you will be required to send more than one transfer.

Some banks charge fees for ACH transactions. And this can be a per-transaction fee. If you’re used to doing multiple transactions, this can add up and put a big dent in your bottom line.

The ACH network only works between U.S. accounts. This means that you can’t conduct any transactions that are meant for international transfers using this payment system. So if you want to send money to someone abroad, you must do so using a wire transfer or other similar payment processing network. As such, the transaction will not necessarily be executed on the same day.

The Bottom Line

Sending money to someone else used to be a big hassle. But the advent of electronic technology is making things much easier. The Automated Clearing House or ACH facilitates transfers between banks. This eliminates the need for withdrawing money from one account and depositing it into another. The network is updated to allow businesses and individuals to execute transactions on the same day. But keep in mind that there are restrictions—notably, that you can’t send money internationally. You may also be limited in how much you can transfer and you may end up incurring fees. Check with your bank about how it handles ACH transactions.

What Is Asset-Based Lending?

Asset-based lending is the business of loaning money in an agreement that is secured by collateral. An asset-based loan or line of credit may be secured by inventory, accounts receivable, equipment, or other property owned by the borrower.

The asset-based lending industry serves business, not consumers. It is also known as asset-based financing.

How Asset-Based Lending Works

Many businesses need to take out loans or obtain lines of credit to meet routine cash flow demands. For example, a business might obtain a line of credit to make sure it can cover its payroll expenses even if there’s a brief delay in payments it expects to receive.

If the company seeking the loan cannot show enough cash flow or cash assets to cover a loan, the lender may offer to approve the loan with its physical assets as collateral. For example, a new restaurant might be able to obtain a loan only by using its equipment as collateral.

The terms and conditions of an asset-based loan depend on the type and value of the assets offered as security. Lenders prefer highly liquid collateral such as securities that can readily be converted to cash if the borrower defaults on the payments. Loans using physical assets are considered riskier, so the maximum loan will be considerably less than the book value of the assets. Interest rates charged vary widely, depending on the applicant’s credit history, cash flow, and length of time doing business.

Example

For example, say a company seeks a $200,000 loan to expand its operations. If the company pledges the highly liquid marketable securities on its balance sheet as collateral, the lender may grant a loan equalling 85% of the face value of the securities. If the firm’s securities are valued at $200,000, the lender will be willing to loan $170,000. If the company chooses to pledge less liquid assets, such as real estate or equipment, it may only be offered 50% of its required financing, or $100,000.

In both cases, the discount represents the costs of converting the collateral to cash and its potential loss in market value.

Special Considerations

Small and mid-sized companies that are stable and that have physical assets of value are the most common asset-based borrowers.

However, even large corporations may occasionally seek asset-based loans to cover short-term needs. The cost and long lead time of issuing additional shares or bonds in the capital markets may be too high. The cash demand may be extremely time-sensitive, such as in the case of a major acquisition or an unexpected equipment purchase.

What Is an Anti-Dilution Provision?

Anti-dilution provisions are clauses built into convertible preferred stocks and some options to help shield investors from their investment potentially losing value. When new issues of a stock hit the market at a cheaper price than that paid by earlier investors in the same stock, then equity dilution can occur. Anti-dilution provisions are also referred to as anti-dilution clauses, subscription rights, subscription privileges, or preemptive rights.

Understanding Anti-Dilution Provisions

Anti-dilution provisions act as a buffer to protect investors against their equity ownership positions becoming diluted or less valuable. This can happen when the percentage of an owner’s stake in a company decreases because of an increase in the total number of shares outstanding. Total shares outstanding may increase because of new share issuance based on a round of equity financing. Dilution can also occur when holders of stock options, such as company employees, or holders of other optionable securities exercise their options.

Sometimes the company receives enough cash in exchange for the shares that the increase in the value of the shares offsets the effects of dilution; but often this is not the case.

Anti-Dilution Provisions at Work

Dilution can be particularly vexing to preferred shareholders of venture capital deals, whose stock ownership may become diluted when later issues of the same stock hit the market at a cheaper price. Anti-dilution provisions can discourage this from happening by tweaking the conversion price between convertible securities, such as corporate bonds or preferred shares, and common stocks. In this way, anti-dilution clauses can keep an investor’s original ownership percentage intact.

Dilution in Action

• As a simple example of dilution, assume that an investor owns 200,000 shares of a company that has 1,000,000 shares outstanding. The price per share is $5, meaning that the investor has a $1,000,000 stake in a company valued at $5,000,000. The investor owns 20% of the company.
• Next, assume that the company enters a new round of financing and issues 1,000,000 more shares, bringing the total shares outstanding to 2,000,000. Now, at that same $5 per share price, the investor owns a $1,000,000 stake in a $10,000,000 company. Instantly, the investors’ ownership has been diluted to 10%.

Types of Anti-Dilution Provisions

The two common types of anti-dilution clauses are known as “full ratchet” and “weighted average.”

With a full ratchet provision, the conversion price of the existing preferred shares is adjusted downward to the price at which new shares are issued in later rounds. Very simply, if the original conversion price was $5 and in a later round the conversion price is $2.50, the investor’s original conversion price would adjust to $2.50.

The weighted average provision uses the following formula to determine new conversion prices:

• C2 = C1 x (A + B) / (A + C)

Where:

• C2 = new conversion price
• C1 = old conversion price
• A = number of outstanding shares before a new issue
• B = total consideration received by the company for the new issue
• C = number of new shares issued

What Is Antitrust?

Antitrust laws are regulations that encourage competition by limiting the market power of any particular firm. This often involves ensuring that mergers and acquisitions don’t overly concentrate market power or form monopolies, as well as breaking up firms that have become monopolies.

Antitrust laws also prevent multiple firms from colluding or forming a cartel to limit competition through practices such as price fixing. Due to the complexity of deciding what practices will limit competition, antitrust law has become a distinct legal specialization.

Understanding Antitrust

Antitrust laws are the broad group of state and federal laws that are designed to make sure businesses are competing fairly. The “trust” in antitrust refers to a group of businesses that team up or form a monopoly to dictate pricing in a particular market.

Supporters say antitrust laws are necessary and that competition among sellers gives consumers lower prices, higher-quality products and services, more choices, and greater innovation. Most people agree with this concept and the benefits of an open marketplace, although there are some who claim that allowing businesses to compete as they see fit would ultimately give consumers the best prices.

The Antitrust Laws

The Sherman Act, the Federal Trade Commission Act, and the Clayton Act are the key laws that set the groundwork for antitrust regulation. Predating the Sherman Act, the Interstate Commerce Act was also beneficial in establishing antitrust regulations, although it was less influential than some of the others.

Congress passed the Interstate Commerce Act in 1887 in response to growing public demand that railroads be regulated. Among other requirements, the law ordered railroads to charge a fair fee to travelers and post those fees publicly. It was the first example of antitrust law but was less influential than the Sherman Act, passed in 1890.

The Sherman Act outlawed contracts and conspiracies restraining trade and/or monopolizing industries in an attempt to stop competing individuals or businesses fixing prices, dividing markets, or attempting to rig bids. The Sherman Act laid out specific penalties and fines for violating the terms.

In 1914, Congress passed the Federal Trade Commission Act, banning unfair competition methods and deceptive acts or practices. The Clayton Act was also passed in 1914, addressing specific practices that the Sherman Act does not ban. For example, the Clayton Act prohibits appointing the same person to make business decisions for competing corporations.

Special Considerations

The Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ) are tasked with enforcing federal antitrust laws. In some cases, these two authorities may also work with other regulatory agencies to ensure that certain mergers fit the public interest.

The FTC mainly focuses on segments of the economy where consumer spending is high, including healthcare, drugs, food, energy, technology, and anything related to digital communications. Factors that could spark an FTC investigation include premerger notification filings, certain consumer or business correspondence, congressional inquiries, or articles on consumer or economic subjects.

If the FTC thinks that a law has been violated, the agency will try to stop the questionable practices or find a resolution to the anticompetitive portion of, say, a proposed merger between two competitors. If no resolution is found, the FTC may put out an administrative complaint and/or pursue injunctive relief in federal court.

The FTC might also refer evidence of criminal antitrust violations to the DOJ. The DOJ has the power to impose criminal sanctions and holds sole antitrust jurisdiction in certain sectors, such as telecommunications, banks, railroads, and airlines.

Major Example of Antitrust Law

In January 2023, the DOJ and eight states filed an antitrust lawsuit against Alphabet’s Google, alleging that the search giant has illegal monopolization of the digital advertising business. “Today’s complaint alleges that Google has used anticompetitive, exclusionary, and unlawful conduct to eliminate or severely diminish any threat to its dominance over digital advertising technologies,” the government agency said.

The filing, which seeks to make Google divest parts of its advertising business, alleges that the company has used acquisitions as a strategy for “neutralizing or eliminating” rivals and forces advertisers to use its products by making competitors’ products difficult to use. The complaint claims that the company’s monopolistic practices curtail innovation, raise advertising fees, and prevent small businesses and publishers from growing.

Google’s advertising business has come under fire from critics who argue that the search giant controls both the supply and demand sides of the digital advertising market. The company provides tools that help websites offer ad space and that assist advertisers in placing online ads. The suit alleges that Google’s dominance in the market allows it to pocket 30 cents of each dollar that advertisers spend using its suite of advertising tools.

The lawsuit marks the second federal antitrust complaint against Google in three years. Under the former Trump administration, the DOJ filed a lawsuit in October 2020, accusing the tech giant of using its monopoly to reduce competition through exclusionary agreements. That case is expected to go to trial this fall.

Google responded to the suit, saying the DOJ was attempting to intervene in the free market. “Today’s lawsuit from the Department of Justice attempts to pick winners and losers in the highly competitive advertising technology sector,” Google Global Ads Vice President Dan Taylor said in a statement.

The Bottom Line

Antitrust laws regulate the concentration of economic power to prevent companies from price colluding or creating monopolies. Proponents of antitrust laws argue that they keep consumer prices lower and foster innovation through increased competition. Critics say antitrust regulations intervene in the free market and reduce efficiency.

Antitrust laws are enforced by the FTC and DOJ, with the agencies focusing on areas of the economy that receive significant consumer spending, such as technology, healthcare, pharmaceuticals, and communications. Typically, antitrust investigations arise from premerger notification filings, congressional inquiries, or consumer and business correspondence.