Cash-Only Businesses: What to Know

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For a new small business owner, opening as a cash-only business may seem like an easy way to get started. But a cash-based business — one that only accepts cash as payment — could limit a business’ growth potential. Here are some pros and cons to help business owners decide what’s best for them. 

What is a cash-based business? 

A cash-based business, also known as a cash-only business, is one that operates exclusively or primarily with cash transactions. This typically includes accepting only cash from customers, but it might also mean paying vendors in cash as well. 

Why are some businesses cash-only? 

Some entrepreneurs prefer to start their companies as cash-only for simplicity. They may assume the process of putting systems in place and acquiring devices to accept debit card or credit card payments will be too complicated or expensive for their startup. Cash may feel more straightforward and less intimidating for a new small business. 

Pros and cons of cash-only businesses 

It might seem quick and easy to get started with cash. But a small business owner could limit their company’s growth if it remains a cash-based business. There are advantages and disadvantages to being a cash-only business. Here are some of the primary pros and cons: 

Advantages of a cash-only business 

Small businesses don’t need any special equipment or knowledge to accept cash, which is likely why it might hold appeal as an easier way to launch a new venture. 

Simplicity 

Cash requires no special devices, no payment processing vendors, and no payment processing fees. For small business owners with limited digital access — a rural farmer’s market vendor, for example, cash might simplify transactions. 

Entrepreneurs without a great deal of confidence in their technological know-how might also prefer cash transactions over other forms of payment. Even if this is true early in a small business’ life cycle, small business owners might consider taking the time to learn about credit card technology to open opportunities for business growth. 

Speed 

For business owners who want to start accepting payments immediately, cash payments come with no barriers or waiting periods. There’s no need to set up an account, wait for equipment, or learn how a point-of-sale (POS) system works. 

However, it may be worth understanding that POS systems for cashless payments have become easier to navigate and are often as intuitive to learn as the typical smartphone. 

Convenience 

Some small business owners may see cash as convenient. Many people have the skill sets needed to manage cash flow without having to use accounting software or other financial tools. The flip side of this, however, is that owners must manage cash manually. The convenience of accepting cash may be outweighed by the complexity of keeping cash accounts straight. Next to the relative ease of using software to track cashless payments, managing cash accounts can be time-consuming. 

Lower fraud or insufficient funds risk 

When a customer pays with cash, a small business owner’s worry about losing that money may decrease. There is no concern over bounced checks or credit cards or risk for chargebacks resulting from customer disputes with a cash only business. While many business owners consider these losses the cost of doing business, others may see being a cash-only business as a way to mitigate those risks. 

However, cash only businesses may be targeted by those passing counterfeit currency or by money launderers. 

Disadvantages of a cash-only business 

A small business owner who opts to run a cash-based business may discover the disadvantages quickly. 

Limited customer base 

Many small businesses will disappoint — or worse, have to turn away — customers if they don’t accept credit cards or digital payments. According to a survey conducted by the Pew Research Center in July 2022, only 14% of Americans surveyed said they continue to use cash in all or almost of their purchases, and a full 41% said they never use cash. The Federal Reserve Bank found that consumers surveyed said they only made 18% of payments with cash in 2021. The continued rise of cashless consumers means cash-only businesses are likely to limit their customer base. 

Smaller sales 

The average value of a cash transaction was $39 in 2022, according to the Federal Reserve Bank of San Francisco, compared to $95 for the average digital or credit card transaction. 

People may spend less in cash for various reasons — looking at the cash might remind them to save more, or they might run out of cash in their wallets long before they hit their credit limit. Whatever the reason, because cash payments trend lower than cashless transactions, cash-only businesses could experience smaller sales. 

IRS concerns  

Thanks to common misunderstandings and misreporting, a cash-only business might trigger a red flag to IRS auditors. This could put a small business at risk of an inconvenient audit, even if they have paid their taxes accurately. If they have not, mistakenly or otherwise, business owners may face repercussions if an audit finds that they failed to report income. 

Remember to consult a tax professional to better understand how taxes can impact your small business and what you must do to pay them properly.  

More difficult accounting 

For many small business owners, accounting may pose one of the bigger operational challenges. A cash-only business could make the process more time-consuming and complicated than electronic transactions. 

Accepting electronic transactions could make a small business owner’s accounting efforts more manageable, thanks to technology and accounting software. 

Security risks 

Customers aren’t the only ones who will notice a local business that only takes cash. For criminals, a cash-only company might become a target. Whether a business owner transports cash to the bank each evening or locks it in a safe for the night, criminals could identify those patterns and put the owner or building at risk for robbery. Insurers may also charge more for cash-based businesses to account for this risk. 

However, having funds automatically deposited into the owner’s bank account for credit card transactions and other electronic payments, this can help eliminate the risk of cash theft. 

Lack of online sales 

Many customers expect the businesses they patronize to have an online presence, including the ability to place orders or make payments online. As consumers’ lives become increasingly digital, many use their devices to buy goods, place takeout orders, purchase event tickets, pay invoices, and more. Cash-only businesses could miss out on revenue from these potential online sales. 

Alternatives to cash 

Technology has lowered the costs and increased the convenience of accepting electronic payments. There are many alternative forms of payment methods to cash that are both affordable and easy. 

Accept payment with money transfer apps 

Apps are about as close to using cash as possible in the digital realm. Small business owners may set up a merchant account by going to each company’s website and following the instructions for merchants. 

Registered merchants may include a payment gateway on their website to accept online payments or use in-person payment methods. Apps can generate a QR code that customers can scan with their phones in-store to make a payment. Note that some services may charge a transaction fee. 

Join a payment processing network 

Business owners today can choose from a wide variety of services that enable cashless payments, like debit and credit card transactions. To join one of the many payment processing networks, a small business owner may apply for a payment processor through a bank or other payment processing company. 

Approved businesses will receive the technology they need to accept payments through that processing network, often a POS system that includes a credit card reader. Small business owners might pay a variety of fees to a payment processor, including startup fees, monthly statement fees, transaction fees, and chargeback fees. 

Should cash-only businesses make the switch? 

Each small business owner will decide if being a cash-only business works for them or if they should make the switch to accepting electronic payments. In many situations, a cash-only business could seriously limit growth potential. But learning as much as possible about how to accept credit card payments and other payment solutions could help a business owner decide if remaining cash-only is truly best for them or if making the switch is easier than they thought. 

The material made available for you on this website is for informational purposes only and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.