How to Avoid Early Termination Fees When Canceling a Payment Processing Contract

So, you’re stuck in a processing contract, and you need to get out, fast. Unfortunately, you’ve signed a payment processing service contract, and your processor won’t let you go unless you pay an early termination fee.

So, you’re stuck in a processing contract, and you need to get out, fast. Unfortunately, you’ve signed a payment processing contract, and your processor won’t let you go unless you pay an early termination fee.

If you're in this situation, you're not alone. Maybe you found a better deal, maybe you need better equipment, or maybe you're just sick of paying unnecessary fees. Whatever your reason, canceling a merchant services contract can be quite the ordeal.

But, it's also a learning opportunity. It'll help you understand how to negotiate terms of future contracts, and what to watch out for. Of course, one of those things is the early termination fee. These fees can be found in contracts from almost any processor, and if you're not careful, they can be extremely costly to your business. Book your free consultation today!

What is an early termination fee?

It goes by many names–early termination fee, early cancellation fee, deconversion fee–but they all mean the same thing: you're losing money.

First things first, if you have a merchant account, you are in some sort of a contract–with a start date and an end date. This contract is, by and large, beneficial for your business because it can provide security for your card processing ability. But when that contract has an early termination fee, the contract term becomes increasingly important.

That term is part of the agreement–you stay in the contract for this set amount of time, and your processing service allows your business to accept credit cards for that term. However, if you need to leave the contract before that set term, the processor still needs to turn a profit. Cancellation fees are their way of ensuring that profit even if you don't require their services anymore.

Generally, these merchant account fees can be grouped into three categories:

  1. Flat termination fees: the fee is fixed no matter when you end the contract.
  2. Prorated termination fees: the fee starts at a certain amount and decreases across the life of the contract.
  3. Liquidated damages termination fee: the fee is based on the estimated profit that the processor would have gained had the contract been completed.

It should be noted that some contracts will charge more than one fee type. For example, your contract could call for a $300 flat cancellation fee in addition to liquidated damages. Don't assume that you're off the hook for those damages if you find that your contract stipulates a flat or prorated fee. Reading the fine print in these contracts is key to getting a full view of what costs you'll incur when canceling a contract.

If you're not able to understand the legalese that is hidden in your credit card payments contract, your best bet is to get an attorney who can help you uncover if your early termination fee requires only liquidated damages or if it will entail paying those in addition to a flat or prorated cancellation fee.

Before signing a contract, make sure you know if there are early termination fees, and what they are. If you're signing a new contract, seek to simplify your contract cancellation fees. If possible, avoid liquidated damages and find a processor that will offer a flat or prorated cancellation fee.

You cannot rely on a salesperson to highlight cancellation fees, which is often found in the fine print of the contract. Make sure you understand from the contract itself what you'll have to pay if you decide to cancel the contract before the term ends. Understanding these early termination fees early on will save you from nasty contract battles later.

How much is it going to cost me?

If you've made the decision to terminate your contract before the end of its term, you can generally expect to pay $100 to $500 in an early termination fee. This rate is completely dependent on the individual contract and whether the fee is flat, prorated, or liquidated damages. Keep in mind that some processors charge additional liquidated damages on top of the early termination fees that can cost you much more--sometimes adding thousands of dollars to your cancellation.

Luckily, there are ways to reduce this cost or at least plan for it in advance.

What is the best way to cancel a payment processing contract?

Looking over your current contract is the first place to start when you're thinking about canceling early. It is probably best to get an attorney to look over your contract to help you to get out with reduced, or even waived, fees. Make sure you understand everything the contract says about early termination and make sure to read the fine print because that is where much of the detail is housed.

Some online resources advise people looking to get out of a contract early to simply cancel their merchant account to cut off the processor's payments at the source. This is a mistake.

Unless you are really in a bind (i.e. your processor is not holding up to their agreement and continuing to charge you exorbitant fees), a processor will still find a way to charge you through a different source, putting your personal assets at risk. Processors may also choose to pursue legal action if you close a merchant account without communicating with them.

The best way to cancel a contract early can be broken down into three steps:

Get everything in writing

Make sure that you have written documents for all of the agreements you make with your processor. They can't hit you with any surprises if you get all their promises in writing. This is also a great way to avoid termination fees, to begin with.

Just because a salesperson says they can get the fee waived for you does not mean that it actually will be unless you get it down in writing. In many cases, the final decision comes down to the agent who sold you the contract, so pulling them back into the conversation gives you a little more negotiating power.

Review your contract, and understand your side of the agreement

If you do have to leave a contract early, look at the merchant processing contract for a personal or individual guaranty. This section of the contract, sometimes called the "Individual Guarantor,” will indicate that the penalties, fees, or damages will fall on you personally, as the signer of the contract, rather than on the company as a whole.

It is important to take this factor into consideration before terminating a contract because it could result in a lot of backlash and added fees resting solely on you. Once you assess the personal guaranty situation in your contract, you can then push on with the cancellation process.

Send the cancellation in writing

Yes, this falls under the first step of "get everything in writing,” but sending a merchant account cancellation letter by certified mail is the most important written document in the process. Instructions for who to send the cancellation to can usually be found within the contract itself.

How can I  avoid or minimize early termination fees?

There are a few ways that these fees can be removed or reduced, but they may or may not be applicable in your situation. There are four possible circumstances that will allow you to get out of your contract with lesser fees:

  • Increasing fees: if your processor has charged service fees above what is stipulated in your contract, they have broken their side of the agreement, and thus, you aren't liable to pay any cancellation fees so long as you leave the contract within a certain period following the rate change (typically 30-90 days).
  • Misleading information: if your processor or salesperson gave misleading information about your contract (whether it be about pricing model, contract length, or cancellation terms) in writing, you won't be liable for the cancellation. However, it should be noted that this complaint will only work for a short time after the contract has been signed.
  • Switching to a new processor: If you're working on a new contract elsewhere, your new processor might be willing to help pay cancellation fees so they can onboard you sooner. Make sure to ask your new processor what assistance they can offer in canceling your previous contract.
  • Going out of business: If your business is shutting down, you can claim that the processor's liquidated damages would be zero, and thus no cancellation fee is owed, but this may or may not work, depending on your contract.

If you're hoping to claim any of these three, legal help will be a necessity. It's up to you to decide whether the costs of that legal battle will be worth not paying the cancellation fee.

The same principle applies when trying to reduce cancellation fees. Flat fees that are written into your contract can't really be negotiated, but other charges, such as those related to liquidated damages, may be disputable. If you feel that you can significantly reduce cancellation fees, seek legal assistance.

Canceling a payments contract can be annoying, but more importantly, it can be costly. Paying  early termination fees is a necessary evil, but if business owners are well educated about costs before entering their contract, they can be prepared if they need to cancel the contract later on.

Taft Anderson

Taft Anderson is the former Product Marketing Manager of Swipesum. A graduate of Washington University in St. Louis' Olin Business School, Taft is a content and branding expert.

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