Pros & Cons of PayPal for Small Businesses

As one of the most trusted online payment solutions, many businesses offer PayPal as a payment method on their websites to encourage sales. In fact, it is one of the best merchant services and leading mobile payment solutions according to our evaluations.

PayPal offers easy and reliable payment services for both online (PayPal Business) and in-person (PayPal Zettle) sales, but not all businesses are compatible with its features. Here are general and product-specific pros and cons of PayPal to consider.

Pros & Cons At a Glance

Pros of Using PayPal

The following are the advantages of using PayPal:

1. Secure Means of Payment

In a recent study, 69% of online shoppers in the US feel more secure purchasing online from merchants that accept PayPal. Because PayPal is known for its security, businesses offering it as a payment option lower their cart abandonment rate and increase conversion.

PayPal has established the following security measures to protect customers who opt to pay with its service:

• Doesn’t share sensitive payment details with sellers
• Has round-the-clock monitoring of transactions to constantly monitor unusual events
• Uses latest encryption technology to secure transactions from the beginning
• Offers fraud prevention by enforcing its policy of not asking for sensitive information via email
• Provides dispute resolution for any customer who wants to complain of unauthorized or incorrect transactions
• Has purchase protection for customers who make purchases using PayPal and for payments made on its website. PayPal offers to reimburse clients the full purchase price they paid plus any original shipping costs, as long as they fall within the appropriate terms and limitations.

2. Diverse Financing Options

PayPal offers loans to its business clients to ensure they always have access to cash needed to expand their operations. Aside from this, PayPal also gives its clients’ customers a credit line they can use to “buy now and pay later.” That option alone makes businesses more attractive and helps drive more sales.

3. Extensive Suite of Payment Solutions

For a long time, PayPal’s payment solutions were focused on online personal and business customers. However, the company has expanded its features to offer on-site and on-the-go payment services as well. This puts PayPal in a great position to work with small businesses that are native to the online world but are looking to expand into brick-and-mortar stores and vice versa.

4. Added Merchant Support Features

PayPal is expanding its services beyond payment solutions by offering services that can help small businesses streamline their business processes—everything from invoicing to recordkeeping, tax computations, marketing, and even shipping. These services give small business owners an opportunity to build their online business from the ground up, fully supported by a strong and secure system.

Here are PayPal services beyond payment solutions that you might find useful:

• Shipping: Business account users get discounts on USPS and UPS shipping while PayPal helps track and confirm the arrival of packages for both sellers and buyers.
• Marketing: PayPal business accounts include tools to gather unique shopper insights so it can create customized incentives at no extra cost.
• Recordkeeping: PayPal keeps extensive records of business transactions and also offers e-invoicing features.
• Tax computations: You can set up PayPal to calculate taxes for every transaction. It can also track the payment volume of your business account and send a Form 1099-K to its user if it crosses the IRS thresholds in a given calendar year.

Small business owners will find that these features are easily scalable, so they should always fit within their budget. PayPal’s website offers a resource center for its business account holders who would like to integrate its full range of business services.

5. Fees Are Cheaper Than Alternative Providers

Because PayPal offers a wide range of services, its pricing structure is diverse. But, this also means small business owners only have to pay for services they want to use and at the level they need them. When analyzing the big picture, the cost of doing business with PayPal translates to a lower overall cost that’s worth the value of the service quality it offers.

Selected PayPal Merchant Fees with Comparisons

6. Integrates Seamlessly With Most Business Software

PayPal integrates seamlessly with most business software solutions—everything from online store builders and web design to marketing solutions. This gives small business owners a wider variety of business solutions to choose from regardless of budget, and allows them to still take advantage of PayPal’s payment processing features.

You can visit the PayPal website to find a directory of providers it works with. Use its search function to help filter through its list of preferred partners. You can even get special discounts if you sign up with their partners using PayPal’s special coupon codes. Also, you can check out its extensive list of software development kits for small business owners and their web developers.

7. Strong Invoicing Features

PayPal offers strong invoicing features for businesses that accept payments after billing their customers. There’s no extra monthly and setup cost, and PayPal is pre-loaded with small business tools for easy billing management—including accepting ACH and e-check payments.

PayPal invoicing includes tools for accepting one-time and recurring transactions. Subscription-based retailers get tools for creating and customizing invoice templates and setting up recurring billing subscription options that are automatically delivered and include payment reminders. For service-type businesses, PayPal lets you create customized quotes or estimates, make adjustments based on customer requests, and convert the same estimates into invoices once approved.

8. Instant Deposits to Your PayPal Account

For a small business, having quick access to funds helps continue its operations. What PayPal brings to the table is immediate access to your sales proceeds in the form of PayPal balance. And, because PayPal is a widely accepted payment method, you can use your PayPal balance to pay your vendors and contractors.

Also, if you sign up for a PayPal Debit Mastercard, you can immediately spend or withdraw your funds anywhere that accepts Mastercard and earn 1% cash back rewards for every eligible purchase. There’s no annual fee and no credit checks, and the card will be sent to you one or two days after your request.

9. Works With Multiple Currencies, Including Crypto

PayPal’s ability to make cross-border payments is among the reasons it has become one of the most popular online payment processing providers today. It supports 24 countries across the globe, allowing account holders to transact and convert their PayPal balance to any of these currencies for an additional 1.5% transaction fee.

The currency conversion is based on the current exchange rate plus a 3%–4% currency conversion spread when:

• Paying for goods or services in a currency other than the currency the goods or services are listed in
• Sending money to a friend or family member such that they receive a different currency from the currency in which you pay
• Sending money using PayPal Payouts such that your recipients receive a different currency from the currency in which you pay

Another unique service of PayPal is its cryptocurrency management features. It supports its own cryptocurrency wallet and provides conversion to fiat currency at no extra cost. This allows account holders to use their cryptocurrency balance to make payments through PayPal. As long as customers have a PayPal cryptocurrency wallet, merchants with or without a cryptocurrency account can offer checkout with crypto without any add-on transaction cost.

10. Mobile-friendly Payment Solutions

PayPal offers mobile-friendly payment solutions for small businesses looking to increase their conversion rates on mobile devices. Whether the business has its own store app or a mobile-first/mobile-optimized website, customers can log in to their secure PayPal account to make payments without having to leave the seller’s website. This added security puts customers’ minds at ease so that they can complete their purchases.

More and more customers are exploring online stores using their smartphones. While mobile sales has seen a huge leap in its share of all ecommerce sales, stores experienced a 76.3% cart abandonment rate from a mobile device standpoint in the past 12 months. And from the list of reasons, the security of personal and financial information remains one of the major concerns for customers.

11. Includes Multichannel Sales Features

If you are an online business owner who wants to participate in occasional in-person sales, such as trade shows, fairs, and farmers markets, PayPal’s POS (PayPal Zettle) and competitive processing rates are a viable option. It provides you with inventory tracking and basic restaurant tools and clock-in/out features to ensure that your sales run smoothly. The mobile app comes with a complete register that lets you ring up sales and manage your inventory.

Want to sell on social media? PayPal’s commerce platform can host your listings, so you can sell online even without a website. PayPal provides you with tools to create listings that generate links you can share on Facebook and Instagram and via email, text, and chats. All you need to do is connect the PayPal Commerce Platform to your social media, and your customers can start making purchases securely.

12. Free POS

PayPal now offers Zettle as its POS software, along with mobile card readers to help users start accepting payments in-store and on the go. There’s no monthly subscription fee or setup cost to use this product, and PayPal offers competitive transaction fees against most flat-rate payment processor alternatives like Square.

PayPal Zettle Pricing

PayPal Zettle allows you to accept credit card, gift card, PayPal, and Venmo payments. And, while inventory management is basic, you can easily create variants, sell by specific units, upload and delete products in bulk, and set up low-stock alerts. It also lets you generate QR codes that your customers can scan and use to pay for their purchases.

Cons of Using PayPal

Here are the disadvantages of using PayPal in your small business:

1. Popular Target for Phishing & Other Scams

PayPal consistently ranks among the most popular targets for phishing scams. According to a cybersecurity report by VadeSecure, PayPal hit its peak in 2019, recording a phishing increase of 111.9% year over year. And while it has slid down to the eighth spot in rankings, the threat remains high with PayPal experiencing a 305% increase in the first half of 2022. The sensitive information inherent to a PayPal account makes it attractive to phishers.

PayPal has installed the most updated security measures in place; however, business account owners will need to know how to identify the latest and most common scam strategies. More information about this is available and always updated on the PayPal website.

As an alternative, we recommend Stripe, a payment processor with advanced security features that includes customizable payment risk level scores, secure data migration, and online identity verification for over 33 countries.

2. Customer Service Needs Improvement

Small business owners will find that the majority of negative feedback about PayPal is connected to its quality of customer service. Complaints vary from lack of support for fraudulent transactions to slow response times when resolving disputes. While PayPal’s customer service is available via phone, email, and social media platforms, users still report unresolved issues that directly relate to poor customer service.

As of this writing, PayPal received a score of 3.7 out of 5 from around 900 PayPal account holders rating their experience of PayPal’s customer service. Majority of complaints revolved around the poor service they received while asking for assistance over fund freezes and account holds.

For a solution with 24/7 support, consider Helcim or Payment Depot.

3. Seller Protection Policy Doesn’t Cover Digital Goods

PayPal’s seller protection policy shields small business owners from costs related to unauthorized transactions and undelivered merchandise. However, this is only for physical goods, which is a disadvantage to online merchants. PayPal does have an extended purchase protection plan for buyers that covers digital products (for those willing to pay extra). In case of any issues, sellers would have an opportunity to provide proof of transaction, including delivery receipts, and transcripts of conversations.

If you are in the business of selling digital products, we recommend Stripe. Radar, Stripe’s chargeback protection solution, includes seller protection for both physical and digital products sold online at a rate of 0.4% per transaction.

4. Potential for Frozen or Delayed Funds

Regardless of who’s at fault, any dispute raised by either the buyer or seller can result in PayPal limiting the merchant’s account. Accounts may be frozen and refunds or returns may be delayed until the issue is resolved. To avoid this hassle, small businesses should maintain constant communication with their customers. This will ensure that customers feel more comfortable reaching out to the seller directly to solve misunderstandings instead of going straight to PayPal to file a complaint.

5. Confusing Transaction Fees

PayPal’s transaction fees are widely varied and rates differ per use case. For example, under PayPal’s commercial transaction category, rates range from 1.90% + 10 cents to 3.49% + 49 cents per transaction. Another category for online card payment services charges anywhere from 2.59% + 49 cents to 3.49% + 49 cents per transaction. There’s also a different set of rates when using PayPal Zettle and for accepting international payments.

Below is a list of PayPal’s current merchant fees:

For an alternative payment solution with simple transaction rates, consider Shopify if you have an online business, and Square for its flat-rate fees if you have a storefront.

6. Considerable Chargeback Fees

A chargeback is a reversal of charges after a purchase, typically initiated by customers when an item is lost, delayed, or not up to their satisfaction. Chargebacks can be costly, especially if you are a business using PayPal. With PayPal, a chargeback results in a $20 penalty per transaction on top of returning the customer’s payment and losing the costs invested into shipping, documentation, and transaction fees.

Consider Square if high chargebacks are a dealbreaker for you. Square offers chargeback protection and waives up to $250 in fees per month.

7. Few POS Features & Benefits

While PayPal Zettle is free, it offers considerably fewer POS features compared to most popular competitors. It doesn’t have kitting and vendor management tools to support larger inventory, nor does it offer add-ons that can scale with your business as it grows. Another disadvantage of PayPal Zettle is that it doesn’t integrate with PayPal’s online store, making sales and inventory sync impossible.

Shopify is the best alternative when it comes to multichannel sales. You get an online store and a free POS app that can handle larger inventory and sync both in-person and online sales and inventory automatically. If you need a mobile POS with a simple online ordering system, Square offers a free solution that is more feature-rich than PayPal’s Zettle.

8. Expensive for International Payments

On top of its standard domestic rates, PayPal charges a premium of 1.5% per transaction when accepting international payments, including donations and for charity. Additionally, PayPal also charges an average of 3% to 4% spread on top of the current exchange rate for any transaction involving currency conversion. This is admittedly pricey, but there are not a lot of competitors out there that offer international payment processing to as many currencies as PayPal.

If your business involves a high volume of international transactions, consider switching to Stripe. While it also charges a 1.5% fee for international payments, the cost for currency conversion is only 1%.

9. Incompatible With High-risk Businesses

As an aggregate payment processor, PayPal is incompatible with high-risk businesses of any kind. Likewise, PayPal Zettle does not support age verification tools, making it incompatible for businesses selling age-restricted products. It also has limited integration features, meaning you can’t really upgrade or expand Zettle’s features.

If you need an online payment processor that’s compatible with high-risk businesses, consider Payment Cloud. It supports medium- and high-risk merchant accounts, and unlike PayPal, it is highly praised for its customer support and has only a few complaints of frozen funds. For a POS system that’s compatible with high-risk businesses, consider Lightspeed or Vend.

10. Lacks Compatible Point-of-Sale Integration

PayPal is an online payment processor first. Its point-of-sale (POS) service is meant to support business account holders who wish to process transactions through PayPal. Unfortunately, PayPal Zettle does not come with any available add-on POS features, nor does it have a range of compatible POS integrations. This makes it difficult for merchants with fast-growing companies that require other back-office tools such as shipping and vendor and employee management.

If you need a payment processing service with strong POS features, Square is your best option, particularly if you run a storefront. For ecommerce merchants, consider Shopify.

11. No Offline Payment Processing

For a mobile POS, it’s crucial to be able to continue accepting payments even when the internet connection is interrupted. Unfortunately, while its mobile card reader is more feature-rich than most of its competitors, PayPal Zettle does not support offline payments. You will have to depend on your data or Wi-Fi when accepting on-the-go payments.

Consider an alternative like Square. Its POS can function offline, and it will store any offline payments to process and sync up once the internet connection is restored.

12. Limited Inventory Features

Inventory management tools in PayPal Zettle are limited and ideal only if you don’t have a large volume of products. You can perform bulk actions—such as uploading, updating, and deleting product listings, and even tracking your inventory level to set a low-stock alert. However, you can only add up to three variant options, and PayPal does not allow you to create kits, build menu items, or manage your vendor list.

If this is a significant disadvantage of PayPal for your business, consider Shopify as an alternative. Not only is it capable of handling larger volumes of inventory, it also provides full integration with its mobile POS app, so your inventory levels are always updated for both website and in-person sales. This makes Shopify the best option for online businesses that require better inventory management.

Bottom Line

There are 429 million active PayPal accounts as of the first quarter of 2022, which means there’s more potential business for small business owners who use the platform. When managed effectively, the benefits of PayPal business accounts can quickly outweigh the negatives. Aspiring entrepreneurs can utilize its financing and tax reporting features to build a profitable business that grows into a successful venture.

You May Also Like…

• Our PayPal Business review
• Learn more about PayPal Zettle—PayPal’s mobile point of sale app
• See the top PayPal alternatives for small businesses
• Learn how to accept credit cards online