At some point in business ownership, you’ll probably find yourself needing to cancel your merchant account for credit card processing. When you do, will you be stuck with cancellation fees? Can you be personally held responsible for ongoing costs, like chargebacks that occur after cancellation?
The biggest concern most small businesses have with Merchant Processing Contracts (MPCs) is how to avoid the industry-standard cancellation fee, also known as an early termination fee. Remember, the lawyers drafting these agreements on behalf of credit card processing companies are smart, and typically you are not the party with leverage when first entering this payment space. However, your MPC itself may help guide you to successfully terminating without the burden and expense of an early termination fee.
First Things First: Personal Guaranty
If you are considering terminating your merchant processing contract there is one important thing you should know immediately: nearly every MPC I have reviewed includes a “personal guaranty.” Thus, the effects (whether it be penalties, fees, or damages for a breach of the agreement) can be brought against you individually and not just your company. With a personal guaranty, even if you are closing your shop, going out of business, or selling your assets as part of an assets purchase agreement, the terms of the MPC may still follow you, the individual business owner.
Where to Look for a Personal Guaranty
Typically, there will be a separate section indicating that you are signing personally and on behalf of the Company. It may be titled “Individual Guarantor(s)” or “Individual Guaranty”. You should also look above or below the actual signature block of the MPC; does it say “authorized representative” or individually? Typically, there will be separate signature blocks for both. Get out your contract and check whether there is a personal guaranty. Right now.
Most, if not all, MPCs expressly state that some provisions survive termination, including the obligation to reimburse the credit card processing company for chargebacks. If you have personally guaranteed the MPC then technically you MAY be on the hook for any damages or fees they could go after the company for if you have breached the contract.
Although the potential financial consequences could be relatively minor, no discussion regarding early termination should be had without first knowing whether your MPC included a personal guaranty.
If your MPC includes a personal guaranty, and it likely does, you should consider the potential impact to you personally before determining whether to terminate. You may start by considering whether there are any outstanding liabilities owed to the processing company, or the amount of the cancellation fee.
Now that you’ve checked for a personal guaranty and considered the implications, let’s get back to termination fees.
Types of Termination Fees
There are two basic types of termination fees for merchant services: flat cancellation fees, and liquidated damages.
A flat fee for termination is just like it sounds: your processor will charge you a pre-determined sum to cancel a merchant account. Your MPC should list the flat cancellation fee. There is no “average” fee, and cancellation fees often start at a few hundred dollars.
A liquidated damages cancellation fee has potential to be quite expensive. With liquidated damages, you’ll be charged the amount that your processor determines it will lose in revenue due to you closing your account. For example, if you have a three-year processing contract, and cancel after one year, you will pay a cancellation fee equal to two years’ worth of processing costs.Also note, it is likely that cancellation fees are considered to be liquidated damages. Liquidated damages provisions may have its own separate heading. If your MPC combines the early termination fee with liquidated damages it will likely say so in the cancellation fee clause. Also, the end of the MPC may have a definitions section; review the definition of “cancellation fee” or “early termination fee” to see whether that is considered liquidated damages. Liquidated damages is a complex topic and you may wish to consult a licensed attorney about your specific situation.
In both cases, paying the cancellation fee is part of ending your contract, but will not absolve you from responsibilities under a personal guaranty.
How to Avoid Paying a Cancellation Fee
First, and perhaps most obvious, look at your MPC. Although each company has its own standard, form contract, as a whole the industry includes similarly written provisions in contracts. It is your MPC that may provide the first and most obvious solution as to how to avoid a cancellation fee. Most service contracts include a “Term” section – look there first.
Although it takes some digging, most, if not all, MPCs provide specific language and instructions on how to terminate your contract without paying a cancellation fee. For example, it may state that you can terminate upon written notice with a specific amount of advance notice (e.g., “at least 60 days prior to the expiration of your term”).
Your MPC may also state that you can terminate without a cancellation fee if it the credit card processor changes the rates, fees, or terms. These changes typically have to be made the MPC itself, as in, what you have already agreed to. For example, if you have agreed to pay a MasterCard authorization fee of $.100, and your processor increases that fee to $.500, then you may be able to terminate without penalty. Look to the MPC itself to see what changes it contemplates. It may say “material” changes to the terms, for example, which is traditionally defined as a change that affects the obligations of the parties or affects the meaning of the document. Arguably, any rate or fee increase is sufficient to terminate the contract without penalty should you have such a provision in your MPC.
If your MPC includes language that provides that no cancellation fee will be incurred if terms are changed, be aware of what exactly you have to do in order to take advantage of it. For example, does your intention to terminate need to be expressed in writing or before the date the change goes into effect? Also, does the MPC only allow you to escape an early termination fee if the change to the MPC is “material”?
The bottom line is that your MPC should expressly state how you can avoid a cancellation/early termination fee.
The best way to terminate your MPC and avoid an ETF is to read the Contract carefully, and ensure that the processor is upholding its end of the bargain. If you do cancel, and the processor attempts to enforce the MPCs terms, you may have common law or statutory defenses to its action. These common law defenses go to the fundamental elements of a contract. Also, depending on the state, your jurisdiction may have statutes which affirmatively state that changes to the terms of [particular types of] contracts provide a right to terminate.
Can’t I Just Close My Bank Account?
Closing the bank account associated with your merchant services account may seem like a simple way to get out of a difficult MPC, as some other websites advise, but it’s not a great solution. Some people think that if the processor no longer has access to the business’s bank account that it won’t be able to do anything, and that’s that. However, processors can use other means to collect, up to an including pursuing legal action. Remember that personal guaranty? Most likely, processors may not simply “go away” because you have closed your account, and that may mean putting your personal assets at risk. While the processors, just like any party, would have to weigh the costs of pursuing you or your company against the likelihood and amount of recovery, it may not want to gain the reputation that one can simply breach their MPCs and face no consequences.
It’s in your best interest to cancel your account through legitimate channels rather than attempting to cut off your processor without its knowledge.
My processor promised no cancellation fees but is charging me one. What can I do?
When you signed up and your processor promised no cancellation fee, did you get it in writing? Sales agents often say what they need to say to get your business. A sales rep may have the authority to waive a cancellation fee, but if you don’t get it in writing through a document like a fee waiver, you’re probably out of luck. If the processing company normally charges a cancellation fee, you’ll need something in writing to show that you’re an exception.
MPCs, like most contracts, include provisions that the contract is the full and final agreement between the parties. Thus, if you are promised no cancellation fee where one would typically apply, it should be properly memorialized in writing signed by the parties, and made a part of the deal. On the other hand, if it is not in the contract then arguably the processor cannot attempt to collect one upon your termination. Be aware, however, it may have other damages should you breach.
Best Practices When Cancelling
If you decide to cancel your merchant service contract, be sure to carefully follow any instructions for cancellation. You should also:
- Document everything – keep clear records of all communication with your processor
- Know your responsibilities – read your MPC and pay attention to the personal guaranty
- Send written cancellation via certified mail
MPCs should have direct instructions for how one terminates, and may have provisions regarding how and to whom notices should be sent. Always follow the instructions in your MPC.
Contact Justin Smith at 214-546-0983 for a consult!