Dave Ramsey is famous for refusing to accept credit cards as payment. The Painted Porch Bookshop in Bastrop, Texas does NOT accept cash; only credit and debit cards for this merchant. And who hasn’t seen the growing list of businesses charging a fee to use a credit or debit card?
Each of these businesses have what they feel is a good reason for doing what they do. Dave Ramsey made a career out of discouraging debt; the Painted Porch Bookshop owner doesn’t want to waste time taking deposits to the bank; and merchants charging a fee to use plastic are only trying to pass the expense of bank fees to the customers costing the merchant those fees.
You might be tempted to have a cash-only business. There are advantages, of course. And disadvantages, too.
First, you have to ask if a cash-only business is legal. The good news is that accepting cash as a business is legal. Some people think business owners prefer cash because they do not report the income. The taxing authorities know that trick and watch cash businesses closely. The main reason for the smile from the merchant when she is paid cash is that there are no bank fees for processing a check or credit card. And those fees can become a large expense for the business.
Let’s review the pros and cons of having a cash-only business. Then we will review some cash-only business ideas worth considering and a few to avoid.
Pros of Cash Only Businesses
Bank Fees
For most business owners the biggest benefit of cash is bank fees. Debit cards generally have lower fees to the merchant over credit cards, but the business owners has no way of knowing for certain the card is credit or debit.
It is not uncommon for a business to pay 3% or more in fees for credit card payments. This becomes serious money fast.
Plus, credit and debit card payments carry the risk the customer will charge-back the payment, causing more bank fees for the merchant and the hassle of getting payment from the customer.
Even checks carry risks. The check can bounce. Plus, each check counts as an item deposited and most banks charge a small fee for each check deposited.
Cash can be deposited with fewer bank fees. Businesses interested in surviving need to consider costs and credit cards are a large consideration. Cash eliminates a large percentage of these growing bank fees.
Instant Access
Credit cards can take a few days to clear your bank. Checks even longer. If the amount is large or the bank notices a larger number of transactions they can slow down processing to handle fraud prevention. In the author’s tax practice the banks sometimes delay processing when more large transactions happen during tax season.
Cash does not have this problem. You can instantly use your money as needed. Banks do not put a hold on cash deposits.
It’s Simple
Cash is simple. Checks take time and you need to train employees in determining if a check is fraudulent. Credit card acceptance requires work to set up. Decisions need to be made. Which processor? Software?
Fraud prevention alone is a massive headache for merchants. Every year compliance must be completed. Setting up credit card acceptance is not a simple phone call. The bank will background the merchant for fraud. The set-up process can take from a few days to weeks. All this takes time. And time is the most precious commodity any business owner has.
Cash is simple. No set-up. No checks. No massive time investment. Cash is the preferred payment method of many small business owners for a reason.
Cons of Cash Only Businesses
Saving all those bank fees, instant access, and simplicity make cash-only a dream business model. Unfortunately, there are also some issues you need to consider before going that route.
Security and Theft
Topping the list is securing your cash receipts.
Employees have access to your cash. Robbery is a serious issue. If your business closes after the bank does, you will either keep the money overnight where robbery is a heightened issue or drop it in the night deposit at the bank. There are many stories where night deposits go wrong. The amount is off or you are robbed at the deposit box.
Cash is a target for thieves. And if you have a cash-only business many people will know you deal with large amounts of cash often. Anywhere in the chain from customer payment to the bank deposit are risk points.
You will need security and training of employees handling cash. Employees will need training on handling a bobbery.
Security alone can eliminate the cost advantages of a cash-only business model. Security is not cheap and it is ongoing. Bad actors will be constantly viewing your cash handling processes for weaknesses. Losses are a real problem for cash-only businesses.
Insurance
Because you deal in cash only, insurance costs may be higher. The heightened risk of robbery where an employee is injured can cause your worker’s compensation insurance rating to climb. Your business liability insurance may also be higher due to the additional risk bad actors will break into your business. Damages add up. Insurance claims are often followed by a rate increase.
Counterfeit Money
You will need procedures for detecting counterfeit money if you accept cash. If the bank detects the counterfeit, the bill will be seized and you will be uncompensated. Training costs for detecting counterfeit money is an expense for businesses that accept cash.
Lost Business
Dave Ramsey says cash is king, but most people pay with plastic these days. Carrying around large amounts of cash is a good way to get a bump on the head. Plus, plastic is less bulky.
An online business will find it impossible to deal in cash-only. Online transactions are largely done with debit and credit cards. Perhaps an ACH transaction from a bank checking or savings account is an option. But still, certain businesses will find cash-only impossible to manage.
Even something as simple as a restaurant will face the possibility of lost business if they take cash-only. Here is a reddit thread of a discussion on people’s opinions on cash-only businesses. It is interesting to see that people are okay with restaurants accepting cash-only. But they want to know in advance. Quite simply, people don’t carry much cash anymore.
With the exception of a few types of business, the cash-only payment model will cost you some sales. Plus, cash payment sales are often smaller than sales paid with credit card.
Wasted Time
Payment by credit card gives the customer a receipt automatically. Customers may wish a written receipt for tax purposes or for personal records. This can slow down the checkout process in your business. Since most people are impatient, this may cause disgruntled customers and may even cost sales.
Another time expense is depositing the cash. Credit and debit card payments are automatically dropped into the merchant’s bank account, often the next business day. Even checks can be set up to deposit automatically. Cash requires a trip to the bank. And that can take serious time out of your tight schedule.
Tracking Customers
Business is difficult during the best days. Tracking customers and having a paper trail are important benefits for growing your business.
Certain businesses make it easier to track clients. Service firms, for example, often invoice each client separately.
Cash requires more inputs to track what your customers currently demand and their changing tastes. Plastic and checks have certain tracking features built into the process. Cash does not.
If your tally at the end of the day does not match a deposit, it is easy to compare the z-tape to the stack of checks. You can also easily reference the credit card processor’s files with your deposits. Tracking data is much easier when details are recorded automatically without any expenditure of time. You will still need an adding machine to run your business. But the detailed information is available to verify all numbers are correct.
Recordkeeping
Recordkeeping with cash is very basic and has no details that can help you improve your business. At the end of the day you tally your cash box and record the revenue.
Cash balances that do not match the cash register are recorded as over/short. The total over/short for the year will either be a deduction or added to income. For some reason cash is short more often than over. And there is no way to check each transaction like you would with checks or credit and debit cards.
Taxes
Cash-only businesses can face greater scrutiny by taxing authorities. Since cash is easier to underreport, the added costs of a tax audit are real.
Large cash deposits ($10,000 and up) are reported to the IRS by the bank. Structured deposits, where you deposit amounts under $10,000 more often, can cause serious legal troubles. The government can seize your bank accounts if they think you are structuring deposits. The onus is on you to prove you did not structure deposits to get your money back. Even if you did nothing wrong, deposits that look like they were to avoid the reporting limit are subject to seizure and forfeiture, plus, the risk of criminal charges.
Once the government thinks you might be doing something illegal, you will face greater scrutiny. Nobody is perfect so having a detailed review of your finances is a time consuming and traumatic experience. It is better to deposit cash over $10,000 than to have many smaller deposits. If the government freezes or seizes your account it can take years to get your money back. No playing it fast and loose with cash deposits!
Cash is not illegal. A cash-only business is not illegal. But even the appearance you are understating income or structuring deposits will get you in hot water FAST!
Cash Only Businesses
There are many good candidate cash-only businesses. Small repair shops, restaurants, taverns, food trucks, nail salons, babysitting, pet sitting, carwashes, and laundromats are all good cash-only businesses. Cash-only businesses I see in my tax practice often that earn good profits are those that do well at flea markets. People at flea markets are prepared to pay cash. If you have a products that sells well at flea markets and farmers markets you have a prime cash-only business opportunity.
The worst businesses for the cash-only business model involve high priced goods and services.
The absolute worst cash-only business is the weed dispensaries popping up in many states where weed sales are now legal. Because federal and state law are not on the same page, banking is impossible for those businesses. Banks refuse to open accounts for these businesses which removed credit/debit cards and checks as a form of payment. Cash is all they have. Taxes are also stacked so badly against these businesses that many go broke over taxes. The legal environment needs to improve before dispensaries will become an acceptable business model.
Side hustles are a natural fit for a cash-only business. Weigh the pros and cons. You can always change your business model if you discover the cash-only method is not working.
Just be careful. You are carrying cash.