When a salesperson gives you a 46-page contract printed in 8-point font, it’s clear that there might be an unfavorable clause hidden inside. Fine-print scams are one of the oldest tricks around and are becoming more common in the financial services industry. As a business owner, you understand that you should always review a merchant account agreement before you sign it, correct?

If reading a contract before putting your John Hancock on it seems like common knowledge, why do so many people fail to actually do it?

While we all need to be more careful, it’s hard to blame us in many situations. Some salespeople, especially in the credit card processing field, have not fully adopted accepted standards of honesty and transparency. Legally, they aren’t liable for your poor choices, so it doesn’t matter to them if you didn’t read everything. In fact, many sales agents may not even be trying to cheat you. Rather, the companies they represent often fail to educate them on the details and risks of the contracts they are selling to unaware merchants. Because of this, it’s crucial to remember that most merchant account sales reps are independent contractors who work on commission, meaning they can profit from your errors. Most get very little supervision or training, and they might not even fully understand what they’re asking you to sign.

The sad truth is that no matter how friendly a salesperson may seem, or how busy you are, you are always better off taking the time to fully understand the agreement you are signing. It will probably take a couple of hours that you don’t want to spare, but it could ultimately save you thousands of dollars. You should read it all, and then, if you didn’t understand some of it, seek outside counsel. To help you understand why this is so important, below are four costly, yet avoidable, terms that are often found in the fine print of a credit card processing agreement.

Early Termination Fee

This fee is starting to go out of style in the merchant services industry, but will be a major hit to your bottom line if you don’t see it coming. In most merchant account agreements there is a high probability that the provider wants you to agree to a term of service (usually 3 years) and that you will incur an Early Termination Fee (ETF) if you cancel your credit card processing service before the expiration of the contract. Early termination fees can range from a nominal amount to a massive penalty (see “Liquidated Damages” below).

The most common situation in which you might fail to notice the early termination fee in a contract is when the contract comes in two separate documents. Often, these documents are referred to as the “Merchant Agreement” and the “Program Guide,” but they may also be called the “Merchant Application,” “Contract Terms,” or something else entirely. The Merchant Agreement (example here) is usually an easy-to-read document of only a few pages that includes an overview of the parties involved and the prices agreed to by all. This document may or may not list the early termination fee. In cases where it does not, it will usually say something like, “The merchant agrees to pay an early termination fee as described in section 33 of the Program Guide.” Sounds easy, right? Just check the Program Guide to see the early termination fee.

Not exactly. In most cases, the Program Guide (example here) is a document in excess of 25 pages, written entirely in small font, that details all of the various recommended procedures for using the service. It’s usually presented as a handbook, but don’t be fooled — it can also contain additional terms of service, including previously unmentioned fees and pricing. One provider in particular is known to routinely list its $495 early termination fee deep within this document, so take it from me: it’s worth looking through.

The best way to avoid getting hit with this cleverly concealed fee is to ask for all relevant documentation before signing anything, including a page that might be referred to as “just an application.” Then be sure to look for any line that mentions a termination fee, and do not sign the agreement until you are shown an explicit figure for this fee or lack thereof. If you locate an ETF, you may be able to negotiate its removal; however, in the vast majority of cases, it is best to walk away and find a provider that doesn’t include them to begin with.

Liquidated Damages Clause

Usually found in the “Termination” or “Effect of Termination” section of the contract, a Liquidated Damages clause ensures that upon early cancellation of service, you must pay an amount equal to your average monthly payments multiplied by the remaining months in the contract. In other words, when a provider says that “the merchant will owe Liquidated Damages” it is really saying, “No matter what, you will pay us all of the money we wanted to make off of you.”

Let’s say you sign up with a provider that includes this clause and end up paying $100 per month in total processing and account fees, but you cancel the agreement after one year because you’ve found a better deal. Since your contract included a Liquidated Damages clause, you will owe the equivalent of your average monthly fees ($100) multiplied by the remaining months in your contract (24), for a total termination fee of $2,400. And for what? Service you didn’t receive or even want in the first place? A Liquidated Damages penalty ensures that a contract is effectively non-cancellable, and at its worst, it can function as a blank check for a provider to impose an excessively large cancellation fee on a merchant.

Liquidated Damages fees are calculated in many different ways and are sometimes simply worded in a way that says that you will owe the greater of one specified amount or another vague amount, but the key is to find the specific language in the contract regarding how the termination fee is assessed. It’s rarely advisable to ever sign an agreement that includes a Liquidated Damages fee, or its equivalent. If you see language that states that you will have to pay according to “whichever is greater” if you cancel your service, run!

Automatic Contract Renewal

Many merchant account agreements contain language similar to the following: “This agreement shall begin on [start date] and remain in effect for 36 months, at which point it shall renew automatically for one-year terms unless requested otherwise by the merchant…” Hopefully the initial contract length of 36 months isn’t an unexpected surprise to you, since even the most unethical salesperson knows better than to hide that information. But the automatic renewal policy, which can be very complicated, can be easy to overlook.

One common stipulation is that you must cancel your agreement no earlier than 90 days and no later than 30 days before the end of the initial term. This gives you a two-month period of time to remember to cancel a merchant account that you probably set up years ago, or else the contract will renew itself automatically (usually for 1-3 years). Since the cancellation process can sometimes be quite involved, including a faxed or mailed handwritten request and the timely return of equipment, you should be aware of just what will be expected of you when the times comes to cancel. Failure to cancel within this window of time can lock you into another round of unwanted payments. Please note that some processors allow merchants to cancel at any time without any sort of complicated procedure.

Reserve Account Policy

The nice thing about reserve policies is that many of them often say the same thing: “the provider reserves the right to withhold any amount at its own discretion in a reserve account as a measure against fraudulent payments.” The language is simple. But the implications are sometimes catastrophic for small business owners.

Read it again: the provider reserves the right to withhold any amount at its own discretion in a reserve account. Usually what this means is that a provider will set up a reserve account and begin funding it if the provider suspects that customer chargebacks will soon be filed against you. This account may be funded through a portion of your sales, or the amount could be directly withdrawn from your bank account. Business owners who experience fund withholding of this kind — especially those with high-risk business types — generally report that these account freezes can occur without notice and may last for an indefinite period of time. Depending on the amount held and the length of the hold, this can be devastating to a merchant.

One common mistake that merchants make is to assume that an otherwise transparent and inexpensive processor won’t hold their funds without notice. You should be aware that most processors, good and bad, have some kind of fraud prevention policy in place that may involve fund holding. Be sure to locate and study this policy in order to avoid having your funds withheld.

Bottom Line

As you can see, merchant account agreements can contain insidious provisions that may come back to haunt you in very costly and frustrating ways. As long as merchants continue to overlook the fine print of these agreements, unethical merchant account providers will continue to hide unsavory terms within them. The best way to fight these practices is by bringing them into the light of day through sharing this information with your fellow business owners. Discuss these provisions, share how to find them within the agreements, expose providers that include them, and together we can make a difference.

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