First things first, ALWAYS READ YOUR CONTRACT. Not only should you read it, you should mark down anything that raises questions and get clarification on them. Just because someone tells you something verbally doesn’t mean it’s going to actually be in the document you sign. Once you’ve signed it, make sure to keep a copy in a safe place in case you need it for future reference.
Just like any other contract, a merchant account agreement can either work for you or against you. Most of the stories you will hear about merchant account contracts sound like nightmares, but then again, no one goes around announcing how they got a fair deal on a contract they signed a year ago. That being said, some merchant account providers and agents are out to intentionally sign you into the most expensive and longest-term contract they can get you into, so you must do your due diligence. Below are some provisions to look for.
Service Agreement Length (Term Agreement)
Most providers will try to sign you into a three year (36 month) contract, but some may try for even longer commitments. Term agreements come with Early Termination Fees (ETFs – covered below) so it is best to negotiate for month-to-month term, but there are circumstances where a commitment from you is warranted.
For instance, if the provider is giving you equipment at no cost, or subsidizing the cost of equipment, then you should think of it like a cell phone contract which will require a term agreement from you. Keep in mind that leasing equipment is not the same as getting equipment at a reduced cost (as it is often marketed). To avoid finding yourself in any term agreements or non-cancellable leases, it is recommended that you always purchase your equipment outright whenever possible.
Check out our top rated providers to find the ones that offer month-to-month and short-term agreements.
Early Termination Fees
As mentioned earlier, term agreements almost always include an Early Termination Fee (ETF) if you cancel your account prior to the expiration of the contract. ETFs can range from hundreds to thousands of dollars depending on the language of the contract with the most common fee ranging from $400 to $500.
Never, I repeat, NEVER sign a merchant account agreement that has a “Liquidated Damages” early termination penalty. Providers sometimes mask this insidious provision with language like “the fee for early cancellation will be $250 or Damages, whichever is greater.” If you see the terms, “Damages,” “Liquidated Damages,” or “whichever is greater” in relation to cancelling service, you are strongly encouraged to find a different provider.
What does it mean? Essentially, such a provision enables a merchant account provider to collect a fee in the amount of all fees that it believes it would have ever collected from you for the life of the contract. Liquidated Damages ETFs almost always measure into the thousands, and sometimes tens of thousands, of dollars.
Merchant account providers often market leases for card acceptance equipment (such as countertop terminals and point-of-sale systems). Leases can save you the upfront cost of buying equipment but will cost you more, likely much more, over the full term of the lease. Equipment leases often require long-term agreements which cannot be cancelled without paying the full cost of the entire lease.
Considering that most countertop terminals can be bought for $150 to $300, and that tablets such as the iPad have reduced the average POS system startup cost to the cost of the tablet itself (card readers are often included for free), there is are very few cases where a lease makes financial sense. Check out Amazon.com and eBay.com before you buy equipment directly from a provider as providers usually have higher prices. Just be sure to ask your provider for a list of which terminals and equipment are compatible with its services before buying from a third party. My recommendation is to avoid leasing equipment except under well-researched circumstances that truly justify it.