Before You Sign: Credit Card Processing Traps That Cost New Businesses Thousands
Before You Sign: Credit Card Processing Traps That Cost New Businesses Thousands
Opening a food business comes with a long list of expenses.
You may need permits, ingredients, packaging, equipment, kitchen space, insurance, a website, and a way to accept payments.
By the time someone offers to take care of your credit card processing, it can be tempting to sign the paperwork and move on.
That is when new business owners are often most vulnerable.
Some processors and independent sales representatives use confusing pricing, long contracts, equipment leases, and low advertised rates to close a deal.
The rate may sound good.
The full agreement may cost far more than expected.
The Advertised Rate May Not Be the Real Rate
A salesperson may promote a very low processing rate.
That number may apply only to certain cards or transaction types.
Your monthly statement may also include:
- A percentage of each sale
- A fixed transaction fee
- Monthly account fees
- Statement fees
- PCI compliance fees
- PCI noncompliance fees
- Batch fees
- Gateway fees
- Chargeback fees
- Annual fees
- Monthly minimums
- Equipment payments
- Early termination fees
Do not ask only what the processing rate is.
Ask for a written list of every percentage, transaction charge, monthly fee, annual fee, equipment charge, and cancellation fee.
The total cost matters more than the lowest number mentioned during the sales pitch.
Understand the Pricing Model
Processors may offer flat-rate, interchange-plus, subscription, or tiered pricing.
Flat-rate pricing
Flat-rate pricing usually charges the same published percentage and transaction fee for most card payments.
It is often easier for a new business owner to understand.
Interchange-plus pricing
Interchange-plus pricing separates the underlying card cost from the processor’s markup.
It can be more transparent, although the monthly statement may be more complicated.
Tiered pricing
Tiered pricing groups transactions into categories such as:
- Qualified
- Mid-qualified
- Non-qualified
The lowest qualified rate may be the number used in the sales pitch.
However, rewards cards, business cards, keyed transactions, and other payments may fall into more expensive categories.
Ask the processor to explain exactly which transactions qualify for each rate.
Be Careful With Equipment Leases
One of the biggest traps is leasing a basic credit card terminal under a long, noncancelable agreement.
A payment of $70 per month may not sound extreme.
Over four years:
$70 × 48 months = $3,360
The terminal itself may have cost only a few hundred dollars.
The equipment lease may also be separate from the processing agreement.
Canceling the processing service may not stop the lease payments.
Before leasing equipment, ask:
- What is the cash purchase price?
- What is the total of every lease payment?
- How long is the lease?
- Can the lease be canceled?
- Will I own the equipment afterward?
- Can the terminal work with another processor?
- Is the equipment locked to this company?
Compare the total lease cost with the cost of buying compatible equipment outright.
Many card readers and countertop terminals are not expensive enough to justify paying thousands of dollars through a long lease.
Free Equipment May Not Be Free
A processor may offer a free terminal or point-of-sale system.
Read the conditions carefully.
The equipment may require:
- A multiyear processing agreement
- A monthly software subscription
- Minimum processing volume
- Exclusive use of one processor
- Equipment return
- Cancellation charges
Ask who owns the equipment and what happens if you cancel.
A free device can become expensive if it locks the business into higher rates or prevents you from switching providers.
Watch for Long Contracts
Merchant agreements may run for several years and renew automatically.
Missing the cancellation window may extend the agreement or trigger a termination fee.
Read the sections covering:
- Initial contract length
- Automatic renewal
- Cancellation deadlines
- Early termination fees
- Liquidated damages
- Equipment return requirements
- Personal guarantees
- Rate increases
Do not rely on a salesperson saying:
- “We never enforce that.”
- “You can cancel whenever you want.”
- “That part does not apply to you.”
If the promise is not written in the agreement, assume it is not part of the deal.
Review the Entire Contract
Ask for the complete agreement before signing anything.
Save copies of:
- The application
- Full terms and conditions
- Fee schedule
- Equipment agreement
- Lease agreement
- Cancellation policy
- Any written promises from the salesperson
Do not sign blank forms or paperwork that will be completed later.
You should know exactly what you are agreeing to before providing a signature or bank information.
Calculate the Effective Processing Rate
The effective rate shows what processing actually costs as a percentage of card sales.
Use:
Total processing charges ÷ total card sales × 100
Suppose your business processes $20,000 in card sales and pays:
- $520 in transaction charges
- $50 in monthly fees
- $25 in compliance fees
- $70 for equipment
The total cost is $665.
$665 ÷ $20,000 = 3.325 percent
Your effective processing rate is approximately 3.33 percent.
That number is more useful than one advertised rate that leaves out monthly fees and equipment payments.
Pay Attention to Fixed Transaction Fees
A processor may charge a percentage plus a fixed amount for each transaction.
For example:
2.9 percent plus 30 cents
The 30-cent portion affects smaller purchases more heavily.
On a $5 sale, the 30-cent fee alone represents 6 percent before the percentage charge is added.
Food businesses with small average tickets should calculate costs using realistic transaction sizes.
Get Several Quotes
Do not sign with the first representative who contacts you.
Request quotes from at least three providers.
Give each company the same estimates:
- Monthly card sales
- Average transaction amount
- Number of transactions
- Online versus in-person sales
- Number of terminals
- Point-of-sale needs
- Contract preference
Ask each company to estimate the complete monthly cost.
Make sure you are comparing similar services.
A basic countertop card reader is not the same as a restaurant point-of-sale system with online ordering, kitchen printers, inventory tools, and handheld devices.
Separate Equipment From Processing
Your business may need:
- A countertop terminal
- A point-of-sale system
- Kitchen printers
- Handheld ordering devices
- Online ordering
- Inventory tools
- Customer loyalty features
That does not mean every feature must come from one company under one long contract.
Bundling can be convenient, but it can also make switching providers difficult.
Ask:
- Can the hardware be used with another processor?
- Can transaction data be exported?
- Who owns the customer information?
- Are software and processing agreements separate?
- What happens if I stop processing with the company?
- Can the monthly software price increase?
- Is technical support included?
A low introductory price may not be worth it if the system becomes expensive or difficult to leave.
Be Skeptical of Zero-Fee Processing
Some companies advertise zero-fee, free, or cash-discount processing.
These programs may shift some or all of the processing cost to the customer through a surcharge or different cash price.
That does not automatically make the offer dishonest, but the program should be clearly explained.
Ask:
- What will customers see?
- How will the charge appear on receipts?
- Are debit cards handled differently?
- What happens with refunds?
- Are there still monthly fees?
- What happens if the rules change?
Do not assume the business will literally pay nothing.
Warning Signs
Be cautious when a salesperson:
- Pressures you to sign immediately
- Refuses to provide the full contract
- Focuses on one low rate
- Claims all processing will be free
- Offers equipment without explaining the conditions
- Says a lease can be canceled but will not put it in writing
- Promises to buy out another contract
- Cannot explain monthly fees
- Says the written contract does not matter
- Wants a signature before showing the total cost
- Discourages comparison shopping
A reputable provider should be able to explain its pricing clearly.
Questions to Ask Before Signing
Before choosing a processor, ask:
- What is the complete transaction rate?
- Is there a fixed per-transaction charge?
- Are there monthly or annual fees?
- Is there a contract?
- Does it renew automatically?
- What is the early termination fee?
- Am I buying or leasing the equipment?
- What is the total equipment cost?
- Can the hardware work with another processor?
- Can rates increase during the contract?
- Are compliance fees included?
- How are chargebacks handled?
- How quickly are deposits made?
- Is customer support included?
- Can I review a sample statement?
Get the answers in writing.
The Bottom Line
Credit card processing is a normal business expense, but it should not become an expensive surprise.
Do not choose a provider based only on the advertised rate.
Review the entire agreement, calculate the effective cost, inspect the cancellation terms, and compare the total equipment payments with the real purchase price of the hardware.
The card terminal sitting on the counter may not cost very much.
The contract attached to it can cost thousands.
Do your homework, compare several providers, and understand every fee before signing.
Leave a Reply