Payments startup Dwolla has just announced a $5 million round of funding.

The round was led by Fred Wilson’s Union Square Ventures and saw participation from Village Ventures, Thrive Capital, and LA-area angel Paige Craig, among others.

Dwolla’s services let you send and receive money to and from other users. The startup’s maximum transaction cost is 25 cents per transaction — a distinct and very important competitive advantage in the crowded and cutthroat payments arena. Also, all transactions less than $10 are free of charge.

The startup says it now has more than 80,000 individual users and 7,500 businesses using the service. Also, the service has passed $1 million per day in transactions.

In a colorful interview with VentureBeat East Coast editor Benjamin Popper last week, Dwolla founder Ben Milne said that being a Midwestern startup has had distinct advantages for the startup.

“Being in Des Moines, we can work on really freaky stuff,” said Milne. “There is this amazing brain trust of people here with a focus on risk, payments, and insurance.”

The Dwolla team took a $1 million institutional round of funding in 2010 and had previously taken smaller rounds from angel investors and in grant money. But getting funding hasn’t been the startup’s biggest challenge; it’s also been busy navigating regulatory minefields.

“When we started, I was kind of naive,” said Milne. “I just called up the regulators and asked how we should do this. Luckily they didn’t shut us down. So yeah, we have a good dialogue going on with Federal Reserve.”

Milne said he wants to build the service into a billion dollar network.

The new cash infusion will allow Dwolla to flesh out its APIs and developer network — a huge part of gaining more users around the web — and “execute on the next phase of Dwolla’s long-term vision,” according to a release the company sent out this morning.

We’re guessing that’s corporate speak for even freakier stuff coming down the pipeline.