Using Paypal as your small business checking account can be a huge temptation. There are no banking hours. The fees are clearcut. There are no minimums to maintain. They even have a Point of Sale program, a credit line, and a small business loan for qualifying merchants. And PayPal is available anytime, anywhere, on almost any device. It sounds like a perfect solution, right? Wrong.
As I always say, “If it is too good to be true, it probably is.” Especially when you are being evaluated for a small business loan. As it turns out, there are several serious issues with using PayPal as your small business checking account. These issues arise for the exact reason it is so appealing: PayPal is not a bank.
Paypal offers you a lot of the same perks as a bank, but they lack a bank’s security and regulations. They run under their own rules and jurisdiction, and it places you and your funds under that jurisdiction. The User Agreement you acknowledge when opening your account gives them the power to make a ruling when there is a dispute. This gives PayPal the right to freeze or charge your account at their discretion. On top of that, it is not considered a valid banking account when taking out a small business loan. This is just the tip of the iceberg.
3 REASONS TO AVOID PAYPAL AS YOUR PRIMARY SMALL BUSINESS CHECKING ACCOUNT
1. PayPal is Not a Bank
Paypal acts like a bank, but it is not regulated like one. In 2002 the Federal Deposit Insurance Corporation (FDIC) declared that Paypal was not a bank. It did not hold real money or have a bank charter. What is in the power of a bank? Protection.
If a bank were to collapse, your money would still be protected. However, PayPal is not FDIC insured. In other words, if the company closed down you are not guaranteed a cent of your money. You would need to take them to court. PayPal’s security and customer support are not regulated by most banking authorities either.
These factors lead to a whole host of problems. Melissa Johnson of Merchant Maverick points out that Paypal reviews revealed poor phone support and sudden account freezes. The Consumer Finance Protection Bureau went after PayPal in a major lawsuit in 2015. According to the charges, PayPal illegally signed up its customers for credit lines without authorization.
2. Your PayPal Accounts Are Vulnerable
Paypal’s seller protection potentially sounds great. If you sell anything through their platform, your business will be treated fairly if there is a dispute, right? The fine print insinuates the answer is “No.”
In reality, the User Agreement offers a merchant very few ironclad protections on their sales and finances. Paypal’s seller protection does not cover anything without a tracking number, such as a digital products or computer downloads. Not membership dues. Not services. They only protect physical products you ship with a tracking number. If a customer claims they never received their purchase, you are pitted against a much more robust Buyer Protection Policy with few, if any, defenses in your favor. The protection is not perfect on qualifying items either. You could still lose both the item and the income if PayPal deems your item was “not as described.”
According to item 4.3 and section 10 in the agreement, a merchant is fully liable for any income. “When you receive a payment, you are liable to PayPal for the full amount plus any fees if the payment is invalidated for any reason.” It doesn’t matter if you sent the right item, if the package was lost in the mail, or if you were victim to a scam. Paypal expects you to pay for any money they lose settling a dispute or charge-back. They may request compliance or they might deduct it from your balance. If the funds aren’t there, section 10 gives them permission to charge your bank and credit cards.
The frustrations of mandated returns don’t stop there. Melissa Johnson points out that PayPal may choose to freeze your account without warning. And it is not a small inconvenience either. In fact, it can take weeks or months to resolve the conflict. If Paypal is your only small business checking account, all your assets are out of your reach without warning – that’s your entire account, not just the amount in dispute. This is definitely a situation none of us ever want to wake-up to.
3. PayPal is Limited
Paypal is very popular, yet it is not as versatile as a regular business checking account. Many utilities, property management companies, suppliers, and credit cards don’t accept Paypal as a payment source. A Paypal account doesn’t offer a bank routing number, checkbook, or a debit card to take care of your immediate business needs. At best you could apply for their third-party regulated credit card.
A PayPal account does not help you attain capital for your business from other sources. In my article about attaining small business loans, I mention that business credit is crucial. It can make or break your chances of attaining a small business loan at a good rate. Paypal, however, does not affect your credit rating at all. Not even when you open up a line of credit with them. It can’t hurt your rating, but it can’t help you either. It benefits you in no way whatsoever.
If you have bad credit, you can still attain a small business loan through alternative lenders such as United Capital Source, but business loan companies will request several years worth of former bank and financial statements. I emphasize bank accounts. Since PayPal is not recognized as a bank, it does not count in most small business loan evaluations. Only a fraction of traditional bank loans will accept Paypal to prove income, to deposit loan funds, or for monthly payments. It is not given the same weight and consideration of a checking account from a federally approved and FDIC insured bank.
Although PayPal markets itself as the ideal solution for your business needs, keep in mind it doesn’t provides services as a bank would. It can quickly turn into a business nightmare at their discretion. Paypal also does not help your credit score or banking records when you apply for a small business loan. This platform is still not as accepted and accessible as a bank-backed account. For all these reasons, PayPal has its uses, but your business checking account is not one of them.