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An early termination fee may come as a surprise if you’ve decided to close your merchant account. Perhaps you’d like to change payment processors, business type, or simply close up shop. But closing an account can mean cancellation fees, or worse, personal liability for occurrences like chargebacks after cancellation based on the terms of your merchant agreement.
While it’s easy to breeze through the fine print of a contract, it’s best to be aware of every fee associated with your merchant account, even the cancellation fee.
Read on to learn more about early termination fees, and how to avoid them.
What Is an Early Termination Fee?
Sometimes called a cancellation fee, an Early Termination Fee (EFT) is what your payment processor will charge you in fees for leaving before your contract’s terms are up. This penalty is fairly standard across the industry and almost always applied.
Even if your business is a limited liability company – meaning it is a separate legal entity from yourself – you could still be held responsible for the terms of your merchant agreement if you signed with a personal guaranty. (A guaranty is a specific kind of legal guarantee where one party promises to pay money if another party fails to.) For this reason, it’s important to understand your contract before signing. With a personal guaranty, the terms of your merchant agreement can still follow you, even after you’ve shuttered company doors.
Understanding the Personal Guarantee
A personal guarantee is a legal term for a specific kind of guarantee. In it, you legally agree to pay back anything owed if another party (your business) does not. This refers to certain kinds of charges that could come up even after you close your merchant account down.
For example, almost all merchant agreements include at least some provisions that survive termination, including the legal obligation to reimburse the credit card processing company for any chargebacks that take place after the cancellation of your merchant account.
If you give a personal guarantee, your payment processor has every right to come after you and your assets if your business doesn’t pay them back. At that point, you are on the line for any damages or fees.
How to know if you’re signing a personal guarantee
There will likely be a separate section of your merchant agreement that indicates you are signing personally and on behalf of the company. It could be titled “individual guarantor(s)” or “individual guaranty.” Above or below that, it might also say, “authorized representative.” This is where you are signing as yourself, and not as simply a representative of your company.
Different Types of Termination Fees
There are a few different types of early termination fees and they’re not all created equal. The best time to negotiate what type of fee you’ll get charged in the event of early termination is at sign-up. Just make sure to get any negotiated terms in writing.
The three most common types of early termination (EFT) fees are:
Flat rate termination fee
A flat fee for termination is a pre-determined sum to cancel your merchant account. Your merchant account will list the amount of this flat fee for cancellation in its terms. This fee varies widely but could range from $200 – $600. If there’s an ETF clause in your merchant contract, there’s not a whole lot to be done about this fee. It’s just the cost of doing business when terminating a contract early.
Prorated termination fee
With a prorated termination fee, the cancellation fee is divided over the life of your contract. The closer you are to the end of your contract, the less you’ll pay to cancel early. This early termination fee starts at a certain amount and decreases over the life of your contract. If you think you’ll end up sticking with your account for at least a year or two, this is about as good as you’ll find in terms of early termination penalties.
Liquidated termination fee
A liquidated early termination fee is by far the most expensive cancellation fee of all. It’s based on what the payment processor estimates their losses to be, i.e., the estimated profit lost over the remaining years of the contract, based on historical averages. For example, if you have a three-year contract and cancel a year into it, the liquidated termination fee would be equal to two years’ worth of processing charges.
At the end of your contract, there may be a definitions section. Review the definition of “cancellation fee” and/or “early termination fee” to see whether or not they’re considered liquidated damages. In either case, you’ll pay the cancellation fee as a part of ending your contract. But that still doesn’t absolve you of additional financial responsibilities that could roll in after, under the personal guarantee. Consult a licensed attorney if you have any questions regarding a liquidated damages clause.
How Much Do Early Termination Fees Cost?
If you’re not careful, early termination fees can cost your business a great deal. It all depends on factors such as the type of early termination fee included in your merchant agreement.
Though it’s hard to predict what the financial fall-out will be for breaching your contract at termination. The ETF will likely go into the hundreds or thousands if you’re ending a contract very early in its term and if it includes liquidated damages.
Always read the fine print and follow proper procedures for cancellation. At a minimum, this will require your strict attention, as well as your intention to terminate in writing, sent through the proper channels, and with much lead time.
Best Practices When Cancelling a Merchant Processing Agreement
All agreements have direct instructions for how to terminate your merchant account to avoid early termination fees. You’ll want to:
- Keep clear records and document all communications with your processor
- Read the fine print of your contract in its entirety to fully understand your rights and responsibilities
- Pay particular attention to the personal guarantee
- Send written cancellation via certified mail or email
- Follow up that it was received
If you can afford the legal counsel, have an attorney look over your merchant agreement. They might help you out of your contract, or reduce/waive fees. Regardless of legal counsel, always follow the termination instructions carefully.
How to Get Out of an Early Termination Fee
Each processor has its terms, though, you’ll find similar language and provisions across the industry. Your merchant agreement will provide specific instructions in the terms section, detailing exactly how you can avoid such early termination fees. For example, it may require that you terminate with a specific amount of advanced notice in writing. This might be a period of 30, 60, or 90 days before the expiration of your terms. Before signing any new merchant agreement, dig into the details around early termination.
If you are being promised there will be no cancellation fee at sign-up, ensure it is documented in your merchant agreement. There are plenty of payment processors out there willing to make an example out of early termination breaches. So, don’t just cut and run. Additionally, if you feel the early termination fee is not something you can pay, simply ask if it can be waived. Some payment processors are willing to work with you.
Final Thoughts: Early Termination Fees
No matter what reason you have for closing a merchant account early, always consider your risk before signing into, or exiting, any contract with a payment processor. Consider a merchant service provider who is transparent about your contract and is willing to negotiate terms with your payment processor on your behalf.