What are the Contract Terms and Early Cancellation Penalties Business Owners Need to be Aware Of?

Know What You’re Signing Up For

If you accept credit card payments, you need to work with a merchant services company. Be certain you fully research every company you are considering working with, or you may find yourself trapped in a contract that doesn’t work in your favor.

Read the Contracts Carefully

Philip Parker of cardpaymentoptions.com, in an interview with BusinessNewsDaily, recommends that small business owners avoid provisions in contracts to “pay ‘damages,’ ‘liquidated damages,’ or any language that obligates you to pay a fee or another undefined amount for canceling service prior to the contract’s expiration.”

Also, check to see if the contract includes an auto-renewal. If it does and you need or want to cancel your small business merchant accounts, you may find yourself being charged a cancellation fee even after your contract term is up because it automatically rolled over into a new contract.

Cancellation Penalties

One particular point of the contract you should pay attention to is what you’ll be charged should you decide to cancel your service. An early termination fee can be a hefty fee, depending on the type of fee the provider levies. Attorney Paul A. Rianda says that a provider may choose one of three types of early termination fees.

  • Your contract may specify you need to pay a flat fee, which may be up to $500.
  • A hybrid fee is “calculated by multiplying a fixed amount by the balance of the term left in the Merchant Agreement.”
  • The last type of fee is calculated depending on what the provider loses by your company canceling the contract.

“Inadequate disclosure of fees is a common problem,” Rianda says. Providers may not disclose that there is a cancellation fee at all, and, if they do, it is not easy to find in the contract. This means that, in addition to thoroughly reading the contract, you may also need to talk to a sales or customer service representative to gather specifics on the fees.

There may be a clause in the contract that could be beneficial to you. According to MerchantCouncil.org, “Many merchant service agreements have a clause that voids the termination fee if processing rates are raised within the contract term.” You may have to find this clause yourself. Many sales representatives have not read their company’s contracts completely and are unaware of this type of clause.

Other Fees

No matter which company you are considering, you will be charged an interchange fee. Suneera Madhani defines this fee in a blog post for Forbes magazine as “the direct cost of credit card transactions from the credit card companies,” and it will be the same with every company. The company also charges a mark-up, which may be percentage-based or a subscription. As a subscription rate is a flat fee, it may end up being a cheaper option for your company.

A Contract Isn’t Necessary

You don’t need to sign a contract in order to set up a small business merchant account. Instead, consider one of the several merchant services providers that operate on a month-to-month basis while still offering quality services.