A customer recently asked this question:

I’m planning on using PayPal to collect payments at first until we grow out of it.  The question, what are the limits and gotchas of PayPal and when will I need a proper credit card processing system?

My answer:

The biggest downside to PayPal is that it sends users off-site to handle payment (which is an advantage to the extent that you don’t want to worry about it) – which can have an impact on your conversion rate.  I personally hate paying with Paypal since they encourage using lower-cost forms of payment than credit cards (funds already in my paypal account, link up my bank account, etc).  Their incentives are toward internalizing transactions (lower transaction costs), not toward getting the $ from the customer as quickly as possible and getting them through the checkout process (maximizing your conversion rate).

Once you hit $5000+ in revenue / month Paypal will likely be more expensive, too.