Cancellation Fees For Services – How They Can Protect Your Small Business (2025 Updated)

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When running a business, certainty is key. In today’s competitive 2025 landscape, having the right legal safeguards in place can make all the difference.

Subscription revenue is an excellent way to secure recurring income by locking your customers into long‑term contracts (think: gym memberships, mobile phone plans, streaming subscriptions, etc.).

However, there is always the risk that your customer may cancel their subscription and stop paying for your service.

This can be detrimental — especially if you’ve invested significant resources into offering the service with a long‑term revenue model in mind. In 2025, many small businesses are facing challenges due to sudden cancellations that disrupt operational and financial stability.

Your business’s day‑to‑day security could also be impacted by customers who cancel on a job at the last minute (say, a hairdresser’s appointment or a car rental hire).

In these situations, business owners might want more certainty in their terms and conditions to ensure you mitigate such risks and safeguard your revenue.

One effective way to do this is by imposing cancellation fees.

Cancellation fees help you cover losses from last‑minute cancellations and encourage your customers to stick with their long‑term commitment. They also provide a measure of financial protection — a critical advantage for small businesses operating on tight budgets.

However, there are important legal limitations on imposing cancellation fees. Under Australian Consumer Law in 2025, such fees can be deemed ‘unfair’ if they cause an imbalance in rights or result in disproportionate detriment to the consumer.

So, if you’re interested in using cancellation fees in your business, you need to make sure you’re doing it right.

What are cancellation fees? When can you charge them? And at what point do they become unfair?

We’re here to help!

What Is A Cancellation Fee?

Consumers generally have the right to cancel services if they’re not delivered as promised. However, cancellation fees are also a way for businesses to protect themselves when cancellations occur without proper notice.

Put simply, a cancellation fee is a charge imposed on clients who cancel a service without adhering to the processes outlined in your service agreement or terms and conditions.

This could include cancelling pre‑booked services, appointments, or even subscriptions without giving the required notice.

Cancellation fees are typically detailed in the terms and conditions that customers agree to when they first start using your service. Even though these fees are common among large organisations like airlines or hotels, they are equally valuable for protecting small businesses.

Budget can be tight for small businesses, and losing a significant contract due to a cancellation can be a real headache.

Let’s go through some examples of when cancellation fees may protect small businesses.

Gym Memberships

Imagine you run a local gym offering flexible memberships paid monthly or annually. In 2025, with consumers expecting convenience and flexibility, it’s crucial to have a robust cancellation policy in your Gym Terms and Conditions — you can even learn more about what to include in these T&Cs here.

But what happens when a member cancels their gym membership before the next billing cycle? Customers might exploit discounted long‑term contracts by cancelling early, leaving you with lost revenue and expenses already incurred, such as facility maintenance and staff allocation.

This is where cancellation fees come in. By imposing a fee when no reasonable notice is given, gym owners can recoup losses and discourage opportunistic cancellations. What constitutes ‘reasonable’ notice can vary, but many businesses require at least a month’s notice for monthly memberships.

In these cases, cancellation fees can provide a financial buffer — ensuring that you’re not left out of pocket if a member changes their mind suddenly.

Car Rentals

Shifting our focus to hire and rental businesses: if you run a small car rental operation, there’s always the risk of a customer cancelling their car hire at the last minute. With a limited fleet, such cancellations can have a significant impact on your revenue.

The last thing you want is to lose a booking that could have been filled by another customer with adequate notice. That’s why including a detailed cancellation policy in your Hire Agreement is so critical. For further insights, check out our article on What You Need To Know About Hire Agreements for guidelines tailored to 2025 conditions.

Why Should My Business Use Cancellation Fees?

Cancellation fees are not exclusive to subscription-based services such as gyms or rental businesses. They provide essential protection against short‑notice cancellations that can disrupt your cash flow and operational planning.

These fees help cover expenses that have already been incurred — whether that’s purchasing supplies, booking staff, or turning away other potential customers while the service was reserved. By establishing clear cancellation policies, you ensure that your customers are fully aware of their commitments while protecting your business’s interests.

Of course, if you’re going to implement cancellation fees, it’s important to do so correctly.

How Can I Make Sure My Cancellation Fees Are Legal?

Before introducing cancellation fees, it’s crucial to ensure your cancellation policy is clearly set out in your terms and conditions. Ask yourself: is your fee fair?

The Australian Consumer Law in 2025 continues to protect consumers from unfair contract terms. For further clarity, our guide on unfair contract terms explains the legal benchmarks that your policy must meet.

The court may deem contract terms unfair if they:

Cause an imbalance in the rights of either party,
Are reasonably unnecessary to the advantage of one party, or
Cause a detriment (whether financial or operational) to a small business.

If a court finds your cancellation fee to be unfair, that term could be declared void, meaning it would not be enforceable by either party.

It’s essential, therefore, that your cancellation policy is both clear and reasonable, ensuring it protects your business without breaching consumer rights.

So, When Can I Charge A Cancellation Fee?

Generally, you can charge a cancellation fee if the customer cancels without giving you reasonable notice. If they do provide adequate notice, you should then make a ‘reasonable’ attempt to refill the vacancy once notified.

Therefore, before imposing a cancellation fee, ensure that you:

Only apply the fee if no reasonable notice has been given, and
Confirm that your cancellation policy does not constitute an unreasonably unfair contract term.

What To Take Away…

While cancellation policies are common among large organisations managing high volumes of revenue, they are equally beneficial for small businesses. With tight budgets, small business owners cannot afford the financial disruption caused by last‑minute cancellations.

Implementing a clear, reasonable cancellation policy in your terms and conditions not only protects your business but also sets clear expectations with your customers. Remember, the key is to ensure your policy aligns with the Australian Consumer Law and is drafted fairly.

A good lawyer can help you understand how cancellation policies can protect your business and ensure they are legally enforceable. In fact, if you’re unsure of how to proceed, our guide on how to choose a small business lawyer is a great starting point.

If you need help putting together a robust cancellation policy or would like to know how else your terms and conditions can be structured to best protect your business, we’d love to help!

You can reach us on 1800 730 617 or drop a line at team@sprintlaw.com.au.

In 2025, as digital services continue to expand and consumer rights evolve, ensuring that your cancellation policy is both compliant and effective has never been more critical. Businesses are increasingly using flexible yet fair cancellation terms to maintain trust and stability. For more insights on drafting secure and legally sound agreements, explore our Contracts Guide and learn about the latest best practices to safeguard your business.

Regie Anne Gardoce

Regie is the Legal Transformation Lead at Sprintlaw, with a law degree from UNSW. Regie has previous experience working across law firms and tech startups, and has brought these passions together in her work at Sprintlaw.

Tomoyuki Hachigo

Tomo is the co-founder of Sprintlaw and a commercial lawyer with a broad range of legal experience. Before starting Sprintlaw, he was an M&A lawyer at a top-tier law firm advising businesses of all sizes from large corporates to startups.