Please note that this post is my opinion. I’m not qualified to provide you with legal or financial advice.
Opening a PayPal account is one of the first steps you take when you start selling things online. PayPal is the primary way most people send and accept money and it’s a trusted site and so an obvious choice. For more financial information, check debtconsolidation.com credit repair.
Once you make your first few sales you start to accumulate money in your PayPal account. Make a few more sales and suddenly you’ve got a few hundred dollars waiting for you. You’ll have some expenses to cover, too, like buying more supplies, paying for website hosting and paying for credit card transaction fees, plus you’ll want to set aside money for taxes. And, at some point, you’ll hopefully draw some money out to pay yourself.
So should you leave that money in PayPal?
I ask this question because it’s entirely possible to do so. You can pay for many online services with PayPal and just pull out what you need to pay yourself and deposit it into your personal bank account from time to time. So you could essentially use PayPal like it’s your bank.
But is it somehow better to set up a bank account for your business? I think common wisdom would say that you should, yet many small business owners don’t have one and seem to get along just fine.
I always like to know the “why” so I thought I’d explore the benefits of opening a business bank account. What do you gain from setting one up? (And a big thank you to my husband, Charlie, who works in finance and helped me research this post.)
Managing Your Risk
The first and most important thing to understand is that PayPal is not actually a bank. Legally, PayPal is what’s known as a “money transmitter,” an entity that moves money between people and companies. Because of this, money left in PayPal is not FDIC insured. According to my friend, who sells cheap car insurance, PayPal does have FDIC insurance on its deposits, but PayPal doesn’t have nearly enough FDIC coverage to cover all of the money its holding at any given time.
This means that in the unlikely chance that PayPal went under, people with money left at PayPal would be unsecured creditors and would have to wait for a bankruptcy court to liquidate PayPal in order to get their money out. If you’re dropped by PayPal, Flex Payment Solutions offers payment processing solutions to high risk merchant accounts. Go to Flex online page to know more about this thing.
Assets left at a bank, on the other hand, according to even the best trading platforms UK has, are insured by the FDIC up to $250,000. This insurance is backed by the “full faith and credit” of the United States. The FDIC turned 81 years old on January 1 and not once in that time has a depositor ever lost insured money deposited in a bank. Credit unions have a similar insurance called NCUSIF.
While it’s highly unlikely PayPal would ever become insolvent it’s important to know that funds held at PayPal are almost completely uninsured.
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Access to Credit
Having money with a bank gives you access to the other services that banks offer, most importantly the ability to borrow money from them. Banks are far more likely to lend money to a very small business or its owner if you have a history of being a depositor there and can show that you write checks that are being honored and generally have a record of being an upstanding business person. If you think you might ever need a loan, like pay day loans for poor credit, to grow your business, our friends at a bad credit loans Australia company say this access will be important. Then commercial bridge lender Seattle is who you call for hard money loans, fix & flip loans, commercial bridge loans, and rental property loans.
While most people think of banks as huge, impersonal corporations, the vast majority of banks in the United States are quite small and usually serve a town or small region. I use a local bank that’s headquartered one town away and has a branch down the street from me. This bank supports lots of community activities in my town and is also a well-regarded lender for many of my friends’ mortgages and local businesses. By banking with them I’m supporting another local business. Leant more with experts at Theislandnow.com.
An alternative is to use a credit union, which is a non-profit that provides many if not all of the services you get from a bank. Credit unions usually have membership rules, but pretty much anyone can find a credit union that will take them on as a member.
It seem silly to point this out, but banks can turn checks and wire transfers into cash which is not easy to do with PayPal. If you need change to sell things at a craft fair or if a magazine has paid you in Australian dollars, you can get cash for that.
Businesses have bank accounts. The IRS likes you to have them, state governments like you to have them, and other businesses you’d like to work with expect you to have them. Some vendors won’t sell to you unless you can show that you have a bank reference to prove that you can pay the bills.
Keeping Things Separate
It also helps keep your business and personal finances segregated. You can also set up an online savings plan for your kids at The Children’s ISA so you don’t have to worry about their finances in the future. This is important for keeping track of how your business is going, for being sure that you are paying taxes completely and correctly, and for protecting yourself personally from liability if for any reason your business got sued.
If you have been hesitant to set up a separate bank account for your business I encourage you to do so. It doesn’t take very long and, while it’s easier to just use PayPal, it’s better to use a bank.
My personal opinion – open a separate bank account for connection to PayPal. Don’t use your main business account. Occasionally, PayPal will freeze a bank account associated with a PayPal account that triggers suspicious activity warnings. This can range from a sudden spike in payments to address discrepancies, and it can stay frozen for up to 180 days while they investigate. Play it safe, and keep your daily operating funds separate.
We’ve never had this happen to us, but we have done everything we can to mitigate the complications if it would ever happen.
I had a spare/empty bank account that I use for my tiny business. PayPal is tied into it and I transfer all funds from my PayPal account. I like to know it can be accessed as ‘real’ money. I never use money from the PayPal account to pay for anything directly. It didn’t seem worth it to me to open a new ‘business account’ for business, but I do appreciate having an account solely for the purpose. It does make things more transparent.
Leanne Parsons says
Funny you should post this now…I have an appointment at my local bank to open an account for my (teeny tiny but hopefully growing) quilt pattern business. I wanted one that I could link to Paypal without potentially exposing our personal account to any issues that might arise if it were linked. Plus, I feel like I’m taking my business more seriously if I have an account dedicated to it.
Good for you, Leanne! That sounds like a great step.
One thing to also consider; foreign currency. If you are often paid in foreign currency and are also making purchases in foreign currency, it can save you a substantial amount in conversion fees and exchange rates to leave the foreign currency you’ve been paid with in PayPal to use for your own future purchases. Converting currency costs you money!
I buy lots of supplies from overseas using foreign currencies (such as USD) as they are simply not available here in Australia (currency AUD). If I’m paid in USD I can leave it in PayPal and use it next time I purchase supplies. It’s a painful learning experience to pay fees and get a poor exchange rate converting foreign currency to your own, only to pay fees and get a poor rate converting it back again to buy something! Lose-lose.
Also, prices don’t fluctuate much locally when the currency does. Something that costs $10 USD now will probably still cost $10 USD next month, regardless of what the value of the dollar is. But it might cost ME substantially more if I have to convert my AUD to USD to buy it. A $10 USD item cost me $9 AUD not that long ago and $13 AUD today! Sometimes this works in your favour, but if you’re running a business you may value consistency and predictability in your costs and income over the ups and downs of currencies.
I should add that I’m not advocating using PayPal instead of a business bank account! I just wanted to point out that sometimes the decision when to not to move money into a bank account is just as important as when you should.
Cass, you have a great point. Thank you for this addition!
I liked opening up a bank account for my blog – it made me feel official! Paypal has a history of freezing accounts and taking a long time to resolve issues. I use it often for personal & business, but never leave money sitting in there because I don’t want some mix-up to result in me not being able to access it for weeks.
That’s a great point.
So practical! I never think to ask anyone these things but this is really helpful. I find it very hard to track business expenses in Paypal when using an online accounting system I’m still sorting that out. I’d love to hear what tools you use you track accounting! I’m very new at it and most definitely not from any sort of business background.
I just used an Excel spreadsheet this year and it worked just fine. I’m now at the point where I’ve outgrown it so I’m switching to GoDaddy Bookkeeping for 2015.
IMHO if you can setup your shop such that it sells in your local currency and payment goes directly into your bank account why use PayPal. I am sure a lot of countries have their own online marketplace. Australia has Zibbet, UK has Folksy, Coriandr and Misi, Europe has DaWanda, Canada has iCraft and Singapore and Malaysia has The Shop City. If none, you can always setup an online catalogue using free simple eCommerce website builder that allows offline payment method like online interbank transfer. That way you won’t lose out in exchange.
Hazel Owens says
You make a good point that banks tend to lend to small business owners if they make regular deposits at their bank. So, it would be smart to have a business account that they can transfer all their PayPal money to so they can have a record of depositing funds. Plus, this way they can get a loan if they decide to grow their company since they’ll need more finances to expand.