Early Termination Fees: How to Navigate and Reduce Them

What is an Early Termination Fee?

Before you sign a Merchant Processing Contract (MPC) with your Merchant Service Provider (MSP), you'll want to look at the penalties you might face if you decide to part ways with your MSP before the contract expires. In cases like this, the industry standard practice is to apply a cancellation fee, otherwise known as an early termination fee, when a merchant decides to break their service agreement.

So whether you are working with a bank, a payment processor, or a merchant service provider, it's important to understand what early termination penalties are and what types of merchant fees you might encounter.

What About Personal Guarantees?

When it comes to early termination penalties and the fees they incur, the personal guarantee clause gives merchants the most concern. This applies when merchants decide to break out of their service contract.  Many, if not most, service agreements contain a personal guarantee clause. 

If you have signed as a personal guarantor on your MPC, this will determine whether the penalties, fees, or damages for a breach of contract can be brought against you personally or whether the losses will be brought against your business. Unfortunately, even if your business is being sold or going under, if you've signed a personal guarantee as the business owner, the terms of your MPC can follow you as an individual.

It can be hard to leverage against these relatively airtight legal agreements, which is why it's essential to thoroughly understand the various termination fee structures you might encounter in a merchant service agreement before you sign it and how each might be applied.

Types of Termination Fees In A Merchant Services Contract

Several types of fees could be associated with an early termination breach of contract in a merchant service agreement or contract. Here's a breakdown of the most common.

Flat rate termination fee

Flat rate termination fees in merchant provider contracts refer to a fixed amount charged to merchants if they terminate their contract before the agreed-upon term ends. This fee is simple to understand, and merchants know precisely what flat rate cost they'll incur if they end the agreement prematurely. However, depending on your provider agreement, the flat rate termination fee could be relatively high compared to other penalty models.

Often, flat-rate fees are meant to be high enough to deter merchants from closing out their accounts or breaking their contracts early.

Prorated termination fee

Unlike flat-rate fees, which are fixed amounts, prorated termination fees are calculated based on the remaining duration of the contract term divided by its regular term fee. So, if a merchant decides to terminate their contract early, they're charged a fee corresponding to the remaining portion of the service contract (often based on the number of days in a month divided by the monthly rate, for example). This offers a little more flexibility over other penalty models, as it lets merchants pay for what they actually use and vice versa. However, prorated fees can also include additional hidden fines that make it hard to know exactly what it will cost to break the MPC early.

Liquidated termination fee

Look carefully at your merchant service contract to see if early termination or cancellation fees fall under a different bracket of your MPC called liquidation damages. These apply when you're selling your business or liquidating your business's assets.

There could be penalties in predetermined amounts agreed upon by both parties at the outset of the contract signing; this will be whatever your provider estimates would be its financial hardship - in both actual damages and in lost future revenue for the remainder of your contract - in the event you dissolve your contract early.

While this offers a lot more clarity around what you'll pay for breaching the contract, liquidation termination can be much larger than you expect, depending on the calculations used.

Once you sign the MPC upfront, there's little you can do to change it later, even if things in your business change. Consider seeking legal advice if early termination fees fall under liquidation damages in your MPC. These clauses can be quite complex, and if you find this to be the case, it'd be wise to protect your business's interests in your contract negotiations.

How Much Is An Early Termination Fee?

Early termination fees can vary significantly depending on the specific terms of your contract and the penalty fee structure your provider provides. If your early termination penalty is a flat-rate fee, regardless of the remaining contract under your term, you might pay a fine of around $250 to $500.

Alternatively, if your penalty is a prorated calculation based on the months or years left on your contract, it would result in a fee proportional to its remaining term. Or, you might pay a liquidation termination fee, predetermined by you and the vendor, that would vary significantly based on your business's size and transaction volume.

It's crucial for merchants to carefully review the terms of their service payment contract, including all its fine print, to understand what they'll be charged for breaking your contract agreement ahead of schedule. 

Reducing Early Termination Fees and Penalties

It can be hard to dispute a legally binding contract once it's executed; however, you can try to mitigate the effects of early termination to avoid paying the maximum penalties. Your Merchant Processing Contract (MPC) itself is critical to successfully terminating your contract—and if you're lucky, it holds the secrets to getting your early termination penalties reduced or forgiven.

For starters, don't just walk away from your contract and call it a lost cause. MPCs have clear instructions on how to cancel service. If you do comply with your agreement, it's harder to enforce penalties. 

You can also open a dialogue with the merchant service provider you're dealing with about the reasons for your termination. This might help both you and your MSP explore alternatives or mutually beneficial solutions. Providers may be willing to negotiate termination fees to preserve a positive relationship or recoup some portion of their penalty instead of none.

If negotiations aren't progressive or possible, review your contract for exceptions. Some contracts include provisions for early termination under specific circumstances, such as changes to the business or unsatisfactory service quality on the provider's part. If this is applicable, you have leverage to argue for a reduced or waived termination fee.

Remember: Always document any issues or grievances you experience during the contract term of a payment vendor. If you must walk away because of bad service, this can strengthen your position when disputing fees. Keep records of service disruptions or breaches of contract by the provider as evidence to support your case for reducing or eliminating termination fees. 

How to Cancel a Merchant Services Contract the Right Way

If you decide to cancel your merchant service contract, do so with intent, documentation, and a written cancellation. Most importantly, carefully follow all of your MPC's instructions for cancellation; you should be able to find the details in your contract. Make sure you: 

• Document all communications: Keep clear records of your communications with your merchant service provider.
• Settle your obligations: Before canceling, fulfill any outstanding obligations as per the contract terms, such as outstanding bills, returning leased equipment, and resolving any disputes. This will make it much easier to execute your cancellation according to the letter of the law. 
• Put your notice in writing: Most MPCs require that merchants provide written notice of cancellation within a specified timeframe, usually 30 to 90 days before the intended termination. 
• Understand your contract: Carefully read through your MPC so you know what you're signing— check to see if you are included as a personal guarantor—and pay close attention to any clauses related to termination.
• Try negotiating with your merchant service provider. Consider negotiating with your merchant service provider if faced with substantial early termination fees or other obstacles. 
• Watch a few billing cycles: After submitting the cancellation notice, monitor billing statements to ensure that all relevant charges have ceased as of the termination date specified in the notice.
• Find a better provider:  Before entering into contract cancellation negotiations, shop around for merchant services that can help you avoid disruptions to your business operations while transitioning. 

By following these steps and adhering to the terms outlined in your MPC, merchants can cancel their merchant services contracts compliantly and transparently and minimize any potential issues.

Final Thoughts about Early Termination Fees

Selecting a trustworthy merchant service provider is key to navigating the landscape of early termination fees. While understanding the intricacies of termination clauses is crucial, prevention is often the best strategy. Electronic Merchant Systems offers everything you need in a payment processor, so you'll minimize the likelihood of encountering circumstances that lead to premature contract termination.