Some vendors in the world of lending ask their customers to sign lengthy multi-year agreements and some also make it difficult to leave the agreement prior to the terms expiring. Read on for more information about negotiating contracts with vendors.
First, you need to read the contract and pay special attention to the following:
- Length of the term
- Terms of exiting the contract early
- Automatic renewals
- Conditions for both parties
Before you sign, you should negotiate these items. You'll never have more leverage than you
do right before the final decision on the vendor you choose. Many lenders forget to obtain a copy of any agreement or contract during the evaluation process. But even if you ask for it later, or receive it late, you can still negotiate prior
to its signing. Remember the products are not live and working until you agree that they are. Typical problematic vendor
contracts include the following:
- Terms of more than one or two years (depending on the product)
- A long list of things you must do to comply with the agreement
- A short list of things they must do to comply with the agreement
- A short list of reasons that allow you to exit the agreement
- A long list of reasons that allow them to exit the agreement
- Lengthy or unreasonable notice of cancellation requirements
- Automatic renewal provisions
- Penalties for leaving the agreement early
Is the vendor asking for an unnecessary lengthy contract?
Lenders should be wary of lengthy contract terms. For example, simple Blanket Insurance and Lender-Placed products, that don't involve high upfront costs to the vendor, don't need a lengthy agreement. There are some products, like Outsourced Tracking, that require a great deal of up-front work. Therefore, it is reasonable for a vendor to ask for a two and possibly even a three-year term. Don’t overcomplicate life with lengthy agreements on simple products, unless one side has major implementation costs. Obviously, in the best of best worlds, you go with the vendor that does not make you sign any type of contract or agreement at all, and the vendor has to earn your business every day. Yes, it may be necessary to outline in an agreement the responsibilities for each party and how the product will be conducted, but may not be needed on all products. For example, mostUnitas Financial Services Gap and VSI policies are continuous until canceled so there are no early exit penalties and no long-term contract.
Find out more about how having why having the right Gap provider matters. Read our blog post titled, "Lenders Need Control Over Gap Waivers they Finance Through Auto Dealers."
Is there an option to exit early without penalty?
Review the list of conditions and reasons that each side has to meet to exit the agreement. It is very important to ensure that when you meet the conditions to exit a contract early, that you may do so without penalty. Make sure the language states that you may exit early without penalty if the product fails to deliver as promised in its features and benefits. Perhaps also add in something about exiting the product without penalty if it is causing consistent issues with your own customers. Add to that list as it makes sense for each particular product. For reasons outside of the agreed upon conditions for early exit, negotiate to keep the penalties for leaving to a minimum.
Does it Include automatic renewals?
Be suspicious of a vendor that makes it difficult when it comes to notifying them you are canceling. Some sneaky vendors include clauses such as, “you must notify us 90 days or more before the end of the contract term or the agreement automatically renews for another three years”. Don’t agree to more than 60 days (30 is preferable) and never agree to a vendor contract that automatically renews. Require to review and sign before any agreement is renewed.
Should you get your legal counsel involved?
Lastly, it may not be a bad idea to let your legal counsel review agreements for you. This is an imperative step to take if there are sections of the agreement you don't fully understand, or if the agreement is very lengthy. Always remember, don’t sign that vendor agreement until it is fully reviewed, negotiated to your satisfaction, and clearly understood.
Again, the bottom line is you have the most leverage before you make your final decision and before you sign the agreement, so don’t be afraid to use it. Sometimes you have to play a little bit of hardball to either make the vendor fully explain the reasoning behind their requirements or to get them to adjust them. Beware if they are not willing to give an inch on their agreement as they may not be flexible enough with the overall program to meet the needs of your institution.
