Selecting a merchant credit card processing service can be the most important decision a small business makes—while contracting with the right firm, who puts their client first, can result in a long-term relationship that promotes success and growth, there are many predatory services out there who not only put their own profit first, but who use unethical and sometimes illegal tactics to profit off of their clients.
Many of these companies hide predatory terms in the fine print of contracts. Since contracts tend to be so complicated and filled with legalese, many small business owners who don’t have the savvy of large corporate law firms to help them navigate the murky waters. This is dangerous because once you agree by signing, you may be trapped. Here are four dangerous clauses that a merchant credit card processing service might hide in the fine print of a contract.
- Early termination fees. Most people are familiar these days with the concept of an early termination fee. This sort of clause locks you into a set contracted term with the provider, charging sometimes exorbitant fees if you try to cancel the service early. Providers often hide these fees by presenting the contract in two separate documents: the “merchant application” and “contract terms,” or similarly titled papers, which will be cross-referenced and buried.
- Liquidated damages clause. Similar to an early termination fee, this clause is often hidden in the “Termination” section of the contract, and stipulates that the business owner will remit, upon early termination, an amount of money equal to the average monthly payment for each month left in the contract. In essence, this says that you’re required to pay out the entire contract even if you end it early. This sort of clause can be even more damaging than an early termination fee. In general, if a contract includes a liquidated damages clause, it’s inadvisable to sign the contract, or any clause that includes fees designated as “whichever is greater.”
- Automatic contract renewal. In this trap, the contract specifies that unless the merchant specifically cancels the contract within 90 days of the contract’s end date, it will automatically renew for another period of time, be it a year, 36 months, or similar. This cancellation process can often be complicated and arcane, so make sure you understand the details of how it has to be done, or better, find a merchant credit card processing service that doesn’t have these kinds of tricky stipulations.
- Reserve Account Policies. This allows the merchant credit card processing service provider to withhold any amount of money it chooses in a reserve account, ostensibly to guard against fraudulent payments. Unfortunately, the “at the provider’s discretion” part means that they can take any amount they desire, and can sometimes directly attach portions of your sales or even out of your bank account. These clauses can be fatal to a small business. While most providers have this sort of clause, be sure to read it in detail to understand their policies so far as informing you and limiting the amount and means by which they agree to withhold.