Sometimes, merchants skip the T&C page or the contract when signing up for the payment processor. Some reputable acquiring banks have simple policies, but some credit card networks or payment service providers lock you into a long-term contract. If you cancel your merchant account for any reason, you will have to pay the early termination fee. The question is what exactly is this fee, why you are being charged for closing your account, and how to avoid it? Let’s start with its meaning.
Early Termination Fee: What Is It?
An Early Termination Fee or Cancellation Charge can come as a surprise to those closing their merchant account with an acquiring bank or a payment processor before the contract’s period is over. This is applicable to all merchants, even those registered as limited liability companies.
It’s therefore important to read the contract’s terms and policies thoroughly before signing. If the termination clause in the contract states that you will be liable to pay a fee for early plan cancellation, you cannot back out of the contract before the term is up or without paying the fee.
What is Personal Guarantee?
A personal guarantee, as the name suggests, refers to the guarantee that you give on behalf of another party. If another party (business, in this case) fails to pay its debts or any dues, you will be held responsible for paying those even if you have closed your merchant account. You might wonder how it is related to the early termination fee. A merchant running a limited liability company might assume that their contract with the payment processor will end the moment they decide to shut their business.
On the contrary, the merchant will be responsible for any chargeback that occurs or other such liabilities that their business might incur after the business closure if they signed the agreement with a personal guarantee. Even if the merchant and the business are considered separate entities, the former will pay the payment processor an ETF or other charges after the business winds up.
Signing the Payment Processing Agreement as a Personal Guarantor
Most merchant account agreements include a clause that makes the merchant liable to reimburse the payment processor if they incur any chargeback after the merchant account is closed. If you refuse to pay the dues, the credit card company or the acquiring bank has the right to sue you. So, how do you know if you are signing the agreement as a personal guarantor on behalf of your business?
There’s a special section for personal guarantees in every merchant contract. You can see the “Authorized Representative” section above or below that. It implies that you are not just signing as a member or representative of the company, but yourself.
How Much Do I Need to Pay?
There’s no fixed amount. It depends on the type and nature of the business you operate and the payment processor you choose. Sometimes, the early termination fee can cost your business thousands of dollars, which is why reviewing it carefully is essential to prevent a huge loss to your business when you decide to shut it down.
We can’t tell how much you will pay if you cancel the contract before its termination date, but you can expect to pay a significant amount if you cancel very early and you have incurred liquidated damages. The only way to avoid the cancellation fee is by avoiding cancellation altogether. Reading the fine print thoroughly will give you a clear picture of the end date.
Types of Termination Fee
The early termination fee can differ depending on the payment service provider you choose. Some allow you to negotiate the terms at the time of registering an account. Let’s check out the common types of ETFs:
Most payment processors charge a flat fee, which is a fixed amount charged if you cancel the contract before the term is over. The fee is usually between $200 and $600, but it can be higher or lower depending on how soon you are terminating the contract. There’s not much you can do about it, as the processor charges this fee as the cost of running the business when winding up earlier than the specified period.
The prorated termination fee is charged based on how close you are to the end of your contract. The total you pay in this fee depends on how soon you cancel the contract with the company and how the payment processor has set the fee. As you reach close to the end of the agreement with the payment service provider, the prorated termination will automatically decrease.
The most exorbitant fee structure for merchants is the liquidated fee. In this, the payment processor includes the fee for the losses they have incurred and the total profit they will lose from your early cancellation. They will calculate the total loss and charge you based on how soon you are ending the contract with them.
Suppose you have signed a five-year contract with a payment processor and are now planning to close your account with them within 3 years. You will pay 2 years worth of the business you’d otherwise do with the payment processor. In other words, the company will charge you a payment processing fee for these two remaining years at the time of cancellation.
These were the three types of early termination fees that a payment processor could charge. For more information, you can read the detailed section of the cancelation policy. Note that this fee does not cover the charges you might incur afterward.
How To Cancel Your Merchant Account?
When signing up for a merchant account with payment processors or acquiring banks, you will be given choices regarding how and when to cancel these accounts successfully so that you don’t incur the early termination fee. Here are some basic steps to keep in mind when terminating your merchant account.
- Document all the conversations you have had with your acquiring bank/payment processor and store it throughout your contract’s length.
- Do not register your account with a payment processor until you have read and understood the fine print completely. Do not skim this part, as it shows all the details about your agreement with the processor and the cancelation charges.
- Check the personal guarantee section and see what you will be held responsible for should you cancel the contract before the term.
- Send your decision of canceling the contract in writing through email or other means.
If you have a budget for legal services, it’s advisable to seek professional help from a certified attorney. They will evaluate your merchant account contract and help you navigate the cancelation process smoothly. They might also help you save money on the termination fee.
How You Can Avoid the Early Termination Fee?
Of course, you can waive the fees if your payment processor has mentioned it in the service agreement. You need to pay close attention to the contract to know the procedure for terminating the contract and waiving the fee. For instance, your payment processor might accept your request for early cancellation if you give advance notice of the same. Basically, you are supposed to give the notice a month or two before canceling the contract.
You can find payment processors that won’t lock you into a long-term agreement. If you can’t pay the termination fee, discuss your requirements with the payment processor to waive it. As mentioned earlier, the amount of the fee and whether it can be negotiated or waived depends on the payment processor you are working with.
If you don’t want the burden of this cancellation charge, do not terminate the contract before the term is up or read the fine print thoroughly and negotiate the deal at the time of registration.
If the early termination fee is too much, you can hire a legal attorney to look into the matter and negotiate the deal with the payment processor. That works only if the fee of an attorney is lesser than the amount you’ll pay in the early termination fee.
You may close a merchant account with the credit card company or the acquiring bank for many reasons. You might be shutting your business for good. Or, you may have found a payment processor better than the one you are currently working with. Whatever the reason is, it’s important to get into an agreement with a payment processor after carefully evaluating the terms and conditions. Sign the deal only if it suits your needs.