Beware of these Merchant Services Contract Clauses

I’ve reviewed hundreds of processor contracts over the years. While some are fairly straightforward, others contain “gotchas” that aren’t always easy to spot. Unfortunately, missing those can cause you a lot of frustration and money.

In this article, I’ll help you avoid pitfalls by showing you what to avoid in your credit card processing agreement.

Clauses to Watch For

Below is a list of my top clauses to look out for in your merchant services agreement and why.

Early Termination Fees

I’ll start with a common one – cancellation fees. Often listed in contracts as an early termination fee or ETF, this is a fee the processor will charge if you cancel your contract early. Many processing contracts are a minimum of 3 years, so if you cancel earlier than that, you’ll pay the early termination fee.

ETFs can be a flat charge (for example $500) or, more problematic, a “liquidated damages” charge. I’ll get into that in the next section. Early termination fees should be clearly listed. If they aren’t, be sure to ask and get any promises in writing.

Whenever possible, avoid contracts with early termination fees. You can either try negotiating with the processor to have it removed or simply go through a marketplace like CardFellow that prevents processors from charging a termination fee.

Cancellation fees are a hot topic for many small business owners, so if you’d like more details, be sure to check out my article on merchant account cancellation fees.

Liquidated Damages

The term “liquidated damages” really just refers to how an early termination fee is calculated. Instead of a flat $500 or whatever amount, liquidated damage clauses allow the processor to calculate the expected amount of money they would have made during the remainder of your contract and charge you that.

They get that number by calculating your average monthly processing cost and multiplying it by the months remaining on your contract. If you normally pay $300/month in processing fees and have 16 months left on your contract, you could owe $4,800!

Liquidated damages are a big risk for any business. Do yourself a favor and skip any merchant service agreements that require liquidated damages as the cancellation fee. Look closely for language specifying that liquidated damages apply when cancelling.

Auto-Renewing Contracts

These aren’t necessarily a bad thing, but they’re worth reviewing carefully. Most processor agreements contain some type of “auto-renewal” clause that extends your contract automatically unless you explicitly end it. A typical auto-renew clause extends the contract for a year after your initial 3-year term expires.

That means that if you’re waiting for your contract to end in order to switch processors, you’ll need to make sure you explicitly cancel. This is not a situation where you have to specifically renew. Instead, you have to specifically cancel. Business owners that have hefty cancellation fees sometimes wait until their current contract expires before switching to a different processor. Just be careful that you know when your contract is up for renewal and ensure that you give notice of not renewing your contract in writing in the timeframe specified. (Often 90 days from contract end.)

One caveat: Auto-renewing contracts can be great if you have a good processing agreement, but unless you chose your processor through a marketplace like CardFellow, which monitors your statements for you, it’s worth keeping an eye on your pricing and services over time.

Equipment Leasing

Leasing credit card machines or POS systems isn’t built into every processing agreement, but if you’ve discussed it with a processor, it may get bundled together. As I’ve written about in the past, I strongly suggest you don’t lease a credit card machine. The terms are often incredibly unfavorable to you as the business owner, with non-cancellable contracts of 4 years (or more!) and hundreds or thousands of dollars over MSRP for the machine. Equipment leasing companies are often aggressive about pursuing business owners who attempt to end contracts, even those who have closed their business.

Do yourself a favor – Avoid leasing altogether and make sure it isn’t in your processing agreement. If you’re struggling to come up with the funds for a full-fledged POS system, consider starting with a more basic countertop credit card machine until cashflow supports an upgrade. If a countertop machine is still out of reach for your current budget, you can try a mobile credit card reader. As one of the least expensive options for getting started taking cards, it will hold you over until you’re in a better position to upgrade.

Even though it may be tempting to look for “freebies,” be wary of free credit card machines.

Pricing Changes

This is where things start to get a little trickier. Some processors include “right to modify” clauses in your processing agreement. These clauses allow them to change your pricing at any time as long as they give you written notice of the change. Some processors use this option sparingly, to adjust their pricing consistent with inflation or other cost increases. But others use it as a way to show you low initial pricing and then consistently raise it over time.

When combined with an early termination fee, pricing modifications can be a double whammy. You’re hit with higher charges and would have to pay a fee to get out of the contract.

The good news is you can fight back against this one. It’s easiest to do so through a processor comparison marketplace like CardFellow, which requires a lifetime rate lock on the processor’s markup so that you won’t deal with fee creep over time. Want to know more? Create a free, no obligation account. Try it now!

Personal Guarantees

Some processors require you as the business owner to sign a personal guarantee, which makes you liable for the costs your business incurs. That includes processing fees, chargebacks, and early termination fees.

This is a tricky one because there are times when a personal guarantee may help you secure better rates or get a processing account in the first place. That can be the case for new businesses with no prior processing and no business history. But it’s not without risks. If you close your business or can’t pay your processing fees, the processor can choose to legally pursue you personally for the money.

If there’s a personal guarantee in your contract, it doesn’t hurt to try to get it removed. Not all processors require it, and if your business is already established, you may be able to show financial stability from the business to strengthen your case.

Minimum Processing Requirements

While it’s usually not the most expensive clause, some contracts require that you process enough in credit cards per month to hit a minimum processing fee charge. There is often a monthly minimum stated, and you must either hit that amount or pay the difference between your processing fees and that monthly minimum. For example, if you have a monthly minimum of $25 but you have a slow month and only pay $15 in processing fees, your processor would charge you another $10 to add up to $25.

In other situations, a processor may specify a minimum monthly processing amount. This happens sometimes when negotiating better pricing for volume. For example, a processor may offer you better rates if you process $50,000/month in credit cards. To maintain that pricing, they may list a $50,000/month minimum.

Merchant agreements do serve a valuable purpose. They lay out the exact responsibilities for both you and the processor. However, they aren’t necessarily impartial or written to benefit you. But knowing what to look for – and what to avoid – can help you get a fair, reasonable agreement.

Before you sign anything, be sure to:

• Read everything, including the fine print and any appendices
• Look for the clauses I listed above and try to negotiate out the less beneficial ones
• Ask questions, especially if there’s something that seems off

If you need help or prefer to leave the legalese to the experts, give CardFellow a try. Our unique credit card processing marketplace allows you to comparison-shop multiple processors. CardFellow has legal agreements with processors, dictating what they can and can’t do within our marketplace. (Early termination fees? Nope! Lifetime rate lock? Always required.) It’s free, private, and no pressure. Sign up today!