As startups scale, managing cash efficiently becomes crucial. However, many founders make the mistake of leaving sizable funds in payment accounts – platforms like Stripe, PayPal, or Square – for convenience. This can quietly undermine both growth potential and security. Here’s why startups should avoid storing excess cash in these accounts and what proactive steps they should take instead.
1. Missed Yield Opportunities. Payment processors are not banks, and most don’t pay interest on balances held in their accounts. With bank savings and money market accounts currently providing competitive yields, holding large cash balances with processors means leaving potential earnings on the table. Over a year, that “small” oversight could cost your company thousands in lost interest – cash that could have been reinvested in team, product, or runway.
2. Lack of FDIC Insurance. Unlike banks, payment processors typically don’t offer FDIC insurance on funds. This means if the payment company faces insolvency or another major event, your startup’s cash may not be protected. In contrast, FDIC-insured bank accounts protect your deposits up to $250,000, offering a crucial safety net for your runway and operational stability. Many banks and financial institutions offer insured cash sweep accounts, which spread your funds across partner banks and extend your FDIC protection.
3. Weaker Fraud Protection. Banks have robust controls, multi-factor authentication for wire transfers, and better fraud monitoring. Payment accounts, however, make it easier to move money out quickly – sometimes with less oversight or security. Funds left sitting too long in these accounts are at higher risk of unauthorized withdrawal or account compromise.
What Should Startups Do?
- Sweep funds regularly. Set up daily or weekly automatic transfers from your payment accounts to your business bank account. This ensures every dollar starts earning interest and is protected.
- Use separate accounts to make payments and receive funds. Keep accounts for receiving payments separate from those used to make disbursements. This adds a layer of control and traceability.
- Review bank yield options. Talk to your bank about money market or high-yield accounts to maximize your cash’s earning power.
Take action to maximize your cash flow
Leaving cash in payment accounts is a hidden drag on your startup’s financial health. By proactively managing your cash, even early-stage companies can safeguard their capital and put every dollar to work. For treasury management strategies, contact Kruze Consulting and ensure your startup’s cash is always protected and productive.
