Pro-tip for Startups: Why You Shouldn't Keep Cash in Your Payment Account

As a startup, managing your finances is crucial for your long-term success. One of the most common practices for companies that generate revenue is to keep large amounts of cash in their payment processing account, such as PayPal, Stripe, Braintree, or Square. However, this may not be the best strategy for your business. In this blog post, we will explain why you should avoid keeping cash in your payment account and how you can transfer your funds to your bank account.

Why Do Startups Keep Cash in Their Payment Account?

When your startup starts to do well, you may find yourself generating a lot of revenue from clients. You may be using a payment processor like Stripe, Braintree, PayPal, or Square to invoice and collect payments. Your clients' money may be sitting in your payment account instead of being transferred to your bank account. This is a common practice among startups, but it is not recommended for several reasons.

Why Shouldn't You Keep Cash in Your Payment Account?

There are three primary reasons why you should avoid keeping cash in your payment account: lack of yield, lack of insurance, and lack of protection against fraud.

Firstly, the cash in your payment account does not generate a yield like it would in a bank account. Banks are now paying somewhere close to 2% on money market funds or even savings accounts on the cash, and if the Federal Reserve 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. Banks offer several treasury management options, so you may want to explore those.

Secondly, your payment account does not have FDIC insurance, unlike your bank account. Banks have FDIC insurance up to $250,000, which means that your money is protected in case the bank goes bust. If your payment processor goes bankrupt, your funds could get commingled, and you may not get your money back. Although this may be unlikely, it is a risk that you may not want to take.

Lastly, payment processors may not have the same level of fraud protection as banks. It is easier to transfer money out of a payment processor than it is to withdraw cash from a traditional bank account. This means that your payment account may be more vulnerable to fraudulent activities. On the other hand, banks have very good fraud protection and payment blockers. You may want to set up multi-factor wire rules with your bank account, which is not possible with most payment accounts.

How to Transfer Funds to Your Bank Account?

Now that you know why you shouldn't keep cash in your payment account, you may wonder how to transfer your funds to your bank account. The process is relatively simple. You can set up a recurring transfer or transfer the daily balance into your company's bank account. This will ensure that your funds are safe, and you are earning interest on your money.

Conclusion

As a startup, managing your finances is critical for your long-term success. Keeping large amounts of cash in your payment processing account may not be the best strategy for your business. The lack of yield, insurance, and protection against fraud are some of the reasons why you should avoid this practice. Instead, you may want to transfer your funds to your bank account regularly. This will keep your money safe and earn you interest in the long run.