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.
Assets left at a bank, on the other hand, 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.
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, this access will be important.
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.