Key takeaways

The Pros & Cons of Using PayPal for Your Small Business

We’ll cover the pros and cons of using PayPal for your small business. Keep reading to learn more.

Author

Theodore Covey

Key Takeaways

54% of consumers are more likely to trust a transaction if it’s done with PayPal.
They support more than 25 currencies throughout over 200 countries.
Their chargeback and fraud protection tools can help reduce chargebacks.
PayPal’s fees aren’t ideal for businesses who want to price competitively.
They’re known to freeze merchant’s access to their funds.

Should You Use PayPal for a Small Business?

PayPal is a great option if you’re breaking into the market and want to build up trust with your customers. Since they’re widely recognized and support more than 25 currencies.

However, this recognition results in high fees and a high chance of PayPal arbitrarily freezing access to your account.

You’ll need to read through these pros and cons to determine whether it’s worth using.

Pros

Let’s explore the pros of using PayPal as a small business owner.

1. Option of Dispute & Claims Processes

These options sound terrible for businesses, but they’re a blessing in disguise.

The dispute process allows you and the customer to work out issues without involving any third party. If the customer isn’t satisfied with your response or if they had an unauthorized transaction, they’ll escalate the dispute to a claim.

The claims process involves PayPal (as the arbiter). They’ll check your evidence and the customers’ and determine who’s in the right. If they side with the customer, they’ll force you to refund the customer.

Yeah, that’s bad.

It’s better than a chargeback, though. Because disputes and claims act as barriers to customers' initiating chargebacks. Moreover, you’ll just lose money from the dispute fee and the refund.

But you won’t have to deal with:

A chargeback fee
The risk of being put on a card network’s chargeback monitoring program
The chargeback process

Disputes come with their own risks. If you have too many disputes, then PayPal could freeze your funds.

Summary: Disputes with buyers can help fix problems without involving others. Too many disputes are bad for sellers, but this is still better than chargebacks which cost more and have more risks.

2. Multiple Payment Options

PayPal supports 25 currencies in more than 200 countries and regions. This allows you to expand your business to various countries. Meanwhile, if a person, for instance, pays for a transaction with the Indian Rupee, PayPal will convert it to US Dollars for a fee.

Also…

With its built-in cryptocurrency wallet, you can accept payments in various digital currencies at no extra charge. There’s no need for a separate crypto account. This opens up a new world of potential customers who prefer to pay with digital currencies.

If you sell in-person, their card readers are excellent. I used them to process transactions when selling at conventions. It acts as a Point-of-Sales (POS) system.

3. Easy-to-Use Invoicing Tools

I have used PayPal’s invoicing tools a lot for various business types — for providing services and e-commerce. While their fees are ridiculous, their invoicing software is the easiest I’ve used.

It’s easy to add all the information you need (e.g., hours, item name, etc) and doesn’t have a limit on the types of characters you use. For instance, I can use certain characters on invoice items that I can’t use on platforms like Wise.

And it’s easy to deal with reminders if a client or customer doesn’t pay you. Just click on the little payment reminder button. Then PayPal will let your client know there’s a missing invoice.

This is the primary reason I prefer PayPal over other payment providers.

4. Seller & Chargeback Protection

PayPal offers a couple protection programs for merchants:

1. Seller Protection

This protects sellers from losing money in situations where a buyer claims they didn't receive an item or if a payment is unauthorized.

If the transaction meets specific requirements, PayPal will reimburse the seller for the full purchase amount. This protection applies to physical and intangible goods (with additional requirements for intangible goods).

2. Chargeback Protection

Chargeback Protection: 0.40% per transaction
Effortless Chargeback Protection: 0.60% per transaction

This is an optional (and paid) program that helps protect merchants against fraudulent credit or debit card transactions.

It covers specific chargeback reasons, such as unauthorized transactions or "Item Not Received" claims.

If the merchant provides the required information, PayPal will waive the $20 chargeback fee and remove the hold on the disputed amount. This protection is only available for business accounts with Advanced Credit and Debit Card checkout.

We talked about this protection in more depth in a separate guide.

Summary: PayPal's Seller Protection helps sellers get money back if buyers claim they didn't get their stuff or if a payment isn't right. PayPal's Chargeback Protection helps businesses get money back for bad credit card payments for a small fee.

5. Access to Small Business Loans

Depending on your needs and eligibility, you could get $5,000 to $100,000 for Business Loans and $1,000 to $150,000 for Working Capital loans [1].

Business Loans can be approved as quickly as the next business day, while PayPal can approve Working Capital loans within minutes, offering rapid access to funds.

Working Capital loans also don’t require a credit check, as approval is based on your PayPal sales history. It’s a great option for sellers with limited or poor credit history.

However, PayPal doesn’t list the APR. These loans also won’t help you build your credit rating.

6. Wide Acceptance & Ease of Use

Most consumers are already familiar with PayPal, making it a trusted and convenient payment option. This familiarity can encourage customers to complete purchases, as they don't need to create new accounts or learn a new payment system.

Moreover, you can tap into a massive existing user base, potentially leading to increased sales and customer loyalty. Studies suggest that 54% of customers are more likely to pay when a business uses PayPal as a processor [2].

On top of that, setting up a PayPal business account is straightforward, and integrating it into your website or online store is usually a simple process. You usually just log into your PayPal account, and it’s set up.

This saves you time and resources that you can then invest in other areas of your business.

And if you’re an avid mobile user, PayPal's mobile app lets you manage everything on the go. Giving you flexibility and convenience.

For instance, you can do the following from your smartphone or tablet:

Send invoices
Track payments
Issue refunds

Summary: PayPal is a popular payment option people know and trust, making shopping easier. It's simple to set up and use for businesses, even on phones, so they can focus on other things.

Cons

Do you like PayPal so far? Perhaps these sections will change your mind.

1. No Protection for Streamers

PayPal’s Seller Protection doesn’t protect streamers since they receive tips (AKA donations). Thus, there’s nothing protecting you from a troll or unhappy viewer from making many small tips then disputing all of them.

Here’s an alternative…

Since this is a unique business type, I recommend using your streaming platform’s digital currency (e.g., Twitch Bits) to avoid situations like chargebacks. Or use a service like StreamElements, which offers SE.Pay that provides chargeback protection.

You will lose a bit of money per tip when using the above platforms, but you transfer the burden of a chargeback to the platform (e.g., Twitch). If a mad viewer were to abuse chargebacks, the platform would be dealing with the consequences of chargebacks.

You’d still lose the tip, though. But it’s a balancing act.

2. Account Limitations

These limitations can arise unexpectedly due to the following:

Suspected unauthorized use
Sudden changes in sales volume
High number of chargebacks [3].

You could accidentally trigger a limitation on your account by logging in from a different IP address. This happened to me and I had to waste an hour on the phone with PayPal’s customer support.

Anyway.

In such cases, PayPal may hold a percentage or a minimum amount of the business's funds, making them unavailable for withdrawal. This can hamper a business's cash flow and ability to operate effectively.

The decision to impose a reserve is based on various factors, including the business's industry, which might be beyond the business's control.

Relying solely on PayPal for transactions could expose businesses to financial instability due to unforeseen limitations.

Summary: PayPal may limit access to your money without warning, causing problems for businesses.

3. Hefty Transaction & Currency Conversion Fees

PayPal's currency conversion fee of 4% is above the standard exchange rate and can be detrimental to businesses engaged in international transactions for several reasons:

These fees can accumulate rapidly, eating into profit margins and potentially making certain transactions unprofitable.
Businesses facing higher costs due to these fees might be forced to raise their prices, making them less competitive compared to businesses using payment platforms with lower or no conversion fees.
These fees are not always transparent. I had to dive deep into their fees page to find this fee.
Small businesses are vulnerable to these fees as they might not have the resources to absorb these additional costs. This can hinder their growth and expansion into international markets.

If your primary demographic is overseas, consider an alternative.

4. Customer Support Isn’t Helpful

Based on my experience, many of PayPal’s business customer service representatives that I’ve dealt with have been vague and/or unhelpful. They have also kept me on the phone for hours without providing a solution.

That doesn’t mean all of their customer service agents are bad. I’ve encountered a couple of nice folks who helped me within minutes.

But that’s not the majority.

According to Consumer Affairs, PayPal has a 1.2-star rating (at the time of writing) for its customer service [4]. 92% of their ratings are 1 star and they focus on PayPal randomly freezing their funds.

If a business encounters a problem with a transaction, account limitation, or any other issue, the lack of reliable and responsive customer service can make it difficult and time-consuming to find a solution.

Such a bad response could make it difficult to run your business.

5. Overactive Fraud Detection

PayPal’s fraud detection services often flags legitimate bank transfers (at least for me) which results in frozen funds when businesses need them most. For instance, I once transferred money and PayPal flagged it for no reason and froze my account.

Can you guess their response when I asked them why?

They literally gave me no response and just unlocked my account. How am I supposed to prevent my account from being frozen in the future? Why should I trust PayPal with my funds if they’re going to arbitrarily freeze it when I could need them in an emergency?

That’s the primary reason I’ve reduced my reliance on PayPal. And if these reasons also scare you, consider one of these alternatives.

Summary: PayPal freezes money unexpectedly, causing trouble for businesses. They don't give good reasons for this, making it hard to trust them.

Alternatives to PayPal

When I decided to reduce my reliance on PayPal, I had to research different payment processors. The following sections will compare them to PayPal and see whether they’re worth using.

1. Stripe: Best Overall

Pros:

Lower transaction fees
Customization and Flexibility:

Cons:

Steeper learning curve
Less consumer recognition

Stripe's developer-friendly platform allows for extensive customization of the checkout process and integration with various tools and platforms. This gives businesses greater control over their payment experience and can enhance customer experience.

This is the alternative that I went with.

Square: Best for Retail Businesses, Restaurants, & Service Providers

Pros:

User-friendly interface
Integrated POS system
Variety of hardware options

Cons:

Higher fees for card-not-present transactions
Potential account holds
Limited customer support options

Due to lower in-person transaction rates, Square is better suited for transactions in stores, at conventions, or in person (in general).

I considered Squarespace when selling at conventions, however, PayPal was much easier to deal with.

Venmo for Business: Best for Small Businesses & Social Sellers

Pros:

Low transaction fees
Social commerce features
Easy to use for existing Venmo users

Cons:

Limited to US customers
Fewer features compared to other platforms
Not ideal for large businesses

Venmo for Business is not as recognized, which could reduce the amount of conversions. I didn’t go with them because they have such a small market share.

In a survey taken by Motley Fool, only 38% of respondents claimed to have used Venmo [5].

PayPal Fees for Sellers (Also a Con)

PayPal lets you create a business account for free. But to actually process transactions or participate in purchase protection programs, you’ll need to pay monthly fees, a percentage of your transaction, or a fixed fee per purchase.

Let’s see what type of fees you’ll encounter in 2024 [6]:

PayPal’s fixed fees are based on the currency that the customer paid with. For instance, when using USD, it’s $0.49. Meanwhile, for Australia, it’s 0.59 AUD. Transactions done with QR codes would be $0.09 or 0.12 AUD.

I spent 30 minutes reading through this list. There are a lot more fees than what I listed.

Statistics to Keep in Mind

Here are some statistics that may help you decide whether it’s worth using PayPal [7]:

Businesses that use PayPal have 33% more completed checkouts.
426 million active seller and buyer accounts.
$1.53 trillion total payment volume in 2023.
They processed 25 billion transactions in 2023, which is comparable to the 3.2 million transactions they processed in 2013.
Average of 58 transactions per account in 2023.
36 million merchant accounts.

How to Create a Small Business Account on PayPal

To create a small business account on PayPal, follow these steps:

Navigate to the PayPal website and click on the "Sign Up" button.
Select the "Business Account" option and click "Next."
Provide an email address that you haven't previously associated with a personal PayPal account.
Set a strong password for your account.
Enter your business name, address, phone number, and type.
Give a brief description of your products or services.
Write your legal name, date of birth, and home address.
Review the terms and conditions, then click "Agree and Create Account."
Check your email inbox for a verification message from PayPal and click on the link to confirm your account.
(Optional) link your bank account to receive payments directly to your bank.
(Optional) PayPal might request additional information to verify your business, such as your business license or EIN.

Once you've completed these steps, you’ll have a PayPal account. From there, you can start accepting payments.

Tips for Using PayPal as a Small Business Owner

Here are some tips to maximize its benefits and minimize potential drawbacks:

Understand how chargebacks, disputes, and claims work with PayPal to know how to protect yourself from losses.
Familiarize yourself with PayPal's fee structure for transactions, currency conversions, and withdrawals.
Regularly review your PayPal transactions and statements to detect any discrepancies or unauthorized activity.some text
- Report any issues to PayPal's customer service.
Provide accurate product descriptions, ship items promptly, and address customer concerns quickly to avoid disputes and chargebacks.
Maintain detailed records of all PayPal transactions, including invoices, shipping details, and customer communication.some text
- You’ll use this information as evidence during disputes or chargebacks.
Understand the factors that can trigger PayPal account limitations. Take preventive measures to avoid these situations.
PayPal's terms and conditions can change, stay informed about any updates that might affect your business.

Wrapping Up

PayPal is a great choice for businesses due to it being widely known and having a secure platform. However, it comes with many downsides that could make it a dangerous choice for businesses.

You can reduce the risk that PayPal poses by reducing the number of chargebacks you receive. You can do this through chargeback alerts, which we offer. Learn more now.

Sources

[1] PayPal: Business loan
[2] PayPal: Nielsen statistics
[3] PayPal: User agreement
[4] Consumer Affairs: PayPal reviews
[5] Fool: PayPal, Venmo, Zelle survey
[6] PayPal: Merchant fees
[7] PayPal: About us

Theodore Covey

Educator

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