What Small Businesses Should Know About Early Termination Fee

March 5, 2020 / Posted in Merchant Fees

Business operations have their ups and downs. In the down periods, a business owner may decide to shut down their merchant account as a way to cut costs. It means canceling the contract with the merchant service provider that allows it to process credit cards. They’ll then probably face an early termination fee. It is essential to understand this potential expense and the possible ways around it.

What Is the Early Termination Fee

As the very name implies, the early termination fee is an amount of money you have to pay for stepping away from a contract, in this case, the Merchant Processing Contract (MPC) with your chosen credit card processing company. That fee is almost always included in the MPC since every merchant processing company wants to protect itself, and small business owners don’t have much in terms of leverage when making a deal.

Types of Early Termination Fees

There are two types of ETF that may occur when you cancel processing services. The first one is a flat fee. It is a predetermined amount of money that the processor will charge, and it should be stated in your contract. It is often set at a few hundred dollars.

A flat fee is a much better option for the merchant than liquidated damages, the other type of fee. They are not fixed, and the processing company calculates them based on estimates of revenue lost due to the cancelation of the contract.

Even after all the fees have been paid, there’s still a matter of the so-called personal guaranty.

What Is Personal Guaranty

A personal guaranty is a provision in merchant processing contracts, and it exists in almost all of them. This is another layer of protection for companies and a way to further reduce their liability. That provision makes you, as an individual, liable for any fees, penalties, or other expenses that may arise from contract termination.

Such a case often happens with chargebacks on credit card transactions after your company had closed your merchant account. If you signed MPC both as representative of your business and as an individual, you might be obliged to reimburse the processing company for any expenses related to your account.

Implications of personal guaranty should be an important factor in your considerations about walking away from MPC.

How to Avoid Being Charged and Is Closing the Account a Viable Solution?

Some may think that a way out of early termination fees might be to simply close the bank account that is associated with the merchant account. That line of thought claims that the processing company won’t be able to act since there would be no more access to the bank account. Sounds good, indeed, but it’s not the best option.

Even if there’s no more bank account, there still is your personal guaranty. You still can be legally pursued, and your household may be at risk. Always have in mind that processors and their lawyers are experienced in those matters and have done it before.

As ever, it will be a question for the processor whether legal action against you would be worth the time and effort. But it isn’t just a matter of simple economics. No company wants to be known as soft on those who break the terms of the contract.

Luckily, there are ways to avoid early termination fees altogether, if certain conditions are met. Those conditions are usually listed in the MPC, as well as the instructions on how to end the contract in the right way.

Change of Terms

This one is pretty straightforward. If the processor decides to change the terms of your MPC, or rates and fees, in other words, to change the MPC itself, you’ll be able to walk away without paying anything. You can’t be legally obliged to anything you haven’t agreed upon.

The related provision of your MPC will state what constitutes the necessary “material” change of the MPC and how and when you should send a notice about the termination to your processor.

Defense Mechanisms In Case the Processor Doesn’t Keep to Its Part of the Deal

Another way to avoid termination fees is to have the evidence that the processor isn’t keeping to its part of the deal. With such proof, you’ll have the defense against any attempt by the processor to enforce the MPC.

Business people negotiating a contract, they are pointing on a document and discussing together

Best Things to Do When Canceling Services

The decision to terminate MPC should never be made lightly, but once you make it, be sure to follow instructions in the contract to avoid any problems. There are some other things you should do in such a case.

It would be wise to have copies of the communication with your processor so that everything can be accessed and reviewed whenever the need arises. You should also keep tabs on what is in your MPC and what responsibilities you took on yourself, personal guaranty most of all. Finally, send termination notice in a stipulated way. Every MPC has a provision about it.

Read the Contract Carefully

Before all else, however, and especially before signing the MPC, you should read it carefully. If necessary, consult a legal expert, so you don’t sign anything too damaging for you or your business. For example, make sure that the processor doesn’t charge both flat fees and liquidated damages if early termination happens.

Also, some processors will tell you that they don’t charge ETF and then charge it. Never take processors at their word, not even the best credit card processing companies. However good some promises may look, if they aren’t written down in the contract, then they don’t exist.


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