Pro-tip for startups: Do not cash in a payment account! Companies that generate revenue sometimes keep large amounts of cash in their payment processing account, like PayPal, Stripe, etc. This is not a good idea.
How does a startup get a lot of cash in a payments account?
So hypothetically, hopefully this is you, your company’s doing really well. You’re generating a lot of revenue. You’re using a Stripe or Braintree, PayPal, Square etc. to invoice and collect from your clients. And the money that you are collecting from your clients are sitting in the payment account not being transferred to your bank account.
Why to not keep cash in a payments account
First of all, cash inside those payment accounts does not generate a yield like it would in a bank. Banks are now paying somewhere close to 2% on money market funds or even savings accounts on the cash - and if the Fed keeps raising rates that will be even higher. Your payment processor is not providing any interest rate on the cash that is sitting in their account. Read more about the treasury management options we are seeing at banks these days!
Secondly, that cash is not insured. Banks have FDIC insurance up to $250,000 so you’re missing out on that. Heaven forbid, Stripe, PayPal, someone like that goes bust, that money gets co-mingled, or etc.. That money is not insured. Now I know that’s a very low probability but the reason why banks have FDIC insurance is for this exact reason. So that’s another thing you’re missing out on.
And third, the best banks have very good fraud protection and payment blockers. It turns out that it’s often much easier to transfer money out of a payment processor than it is to wire or withdraw cash from a traditional bank account. We suggest that our clients set up multi-factor wire rules with their bank accounts, and this level of protection is not possible with many payment accounts.
Those are the three big reasons why we really recommend not storing your cash in the PayPal, Braintree, Stripe account. It’s really easy to fix this - just set up a recurring transfer or transfer the daily balance into your company’s bank account.
Hope that helps if you have other questions on cash management or payment options, payment accounts or just general startup accounting, hit us up at kruzeconsulting.com.