# What Is an Offtake Agreement in Project Financing?

> **Definition**
>
> Offtake agreements are essential tools in project financing. They establish legally binding contracts between producers and buyers to sell future products, which helps secure necessary funding for construction or expansion projects. These agreements not only guarantee a market and steady revenue stream for producers but also provide price and supply stability for buyers, especially in volatile markets such as energy and natural resources.

## What Is an Offtake Agreement?

The term offtake agreement refers to an arrangement between a producer and buyer to purchase or sell portions of the producer's upcoming goods. Offtake agreements help companies secure [financing](https://www.investopedia.com/terms/p/projectfinance.asp) for future projects by promising future income and showing demand for their goods. They are usually negotiated in [unstable](https://www.investopedia.com/terms/v/volatility.asp) markets before a company builds a facility, ensuring a market position and future revenue.

### Key Takeaways

*   An offtake agreement is a legally binding contract between a producer and a buyer to purchase goods yet to be produced.  
    
*   These agreements are crucial in project financing as they assure future income, making it easier to secure loans for new facilities or expansions.  
    
*   Common in volatile markets, offtake agreements lock in prices and ensure supply for buyers, providing financial stability for producers.  
    
*   Most offtake agreements include force majeure clauses, which can release parties from obligations due to unforeseen events like natural disasters.  
    
*   There are various types of offtake agreements, including hedging, take or pay, and long-term sales, each offering different benefits and protections.

![Offtake Agreement: An arrangement between a producer and a buyer to purchase or sell portions of the producer's upcoming goods.](https://www.investopedia.com/thmb/_xjd9Qaq787fLSJ2oIpDtlYLlhc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/offtake-agreement.asp-final-12268bd89d504498835f6e6ed3776d5e.png)

*— Investopedia / Julie Bang*

## How Offtake Agreements Facilitate Project Financing

An offtake agreement is a legally binding contract between a buyer and seller. It can take the form of a purchase agreement for the buyer or a service contract for the seller. The contract's provisions usually specify the [purchase price](https://www.investopedia.com/terms/p/purchaseprice.asp) for the goods and the delivery date, even though the agreement is reached before any goods are produced and any ground is broken on a facility.

The offtake agreement is commonly used in project financing, which is why it serves an important role for the producer. Producers can face issues if they have no [cash flow](https://www.investopedia.com/terms/c/cashflow.asp)—especially when production hasn't even started and/or when they are trying to secure a production facility. Offtake agreements make it easier to obtain [financing](https://www.investopedia.com/terms/f/financing.asp) to construct a facility. If [lenders](https://www.investopedia.com/terms/l/lender.asp) can see the company has clients and customers lined up before production begins, they are more likely to approve the extension of a [loan](https://www.investopedia.com/terms/l/loan.asp) or credit.

The arrangement ensures a steady [supply](https://www.investopedia.com/terms/s/supply.asp) of goods to meet consumer [demands](https://www.investopedia.com/terms/d/demand.asp). If problems arise before production, companies can back out of an agreement through negotiation and paying a fee.

Offtake agreements are frequently used in markets that tend to be volatile. This includes energy, oil, mining, and [natural resource development](https://www.investopedia.com/articles/basics/12/natural-resource-investing.asp). The capital costs related to the extraction of resources in these markets are often significant. With an offtake agreement, a company secures a guarantee that some products will be sold. They are also used to finance major projects like real estate and [infrastructure](https://www.investopedia.com/terms/i/infrastructure.asp) development.  

## Key Clauses in Offtake Agreements

Most offtake agreements include [force majeure clauses](https://www.investopedia.com/terms/f/forcemajeure.asp), which remove liability if unforeseeable events prevent meeting contractual obligations. These clauses may also be enforced if one party puts unnecessary hardship on the other.

Force majeure clauses protect against acts of nature like floods, wildfires, and other damaging events.

> **Important**
>
> Offtake agreements have default clauses outlining recourse if either party violates the contract. This includes penalties for either party if the agreement is violated.

## Common Variants of Offtake Agreements

The following are some of the most common types of offtake agreements used by producers and buyers:

*   **Hedging:** This type of offtake agreement provides the seller or producer with protection against fluctuating prices. The terms of the offtake agreement include a minimum and maximum range, [hedging](https://www.investopedia.com/trading/hedging-beginners-guide/) against any market price volatility.
*   **Take or Pay:** The buyer agrees to pay the seller even if they don't purchase the goods under the terms of this type of agreement. This gives the seller some guarantee that they will receive payment even if the buyer decides to back out of the contract.
*   **Long-Term Sales:** This type of contract is put in place for longer periods, particularly for markets that have multiple buyers. Most long-term sales contracts allow buyers to purchase suppliers' goods at [market prices](https://www.investopedia.com/terms/m/market-price.asp).

## Advantages of Entering Into Offtake Agreements

Offtake agreements provide a guaranteed [market](https://www.investopedia.com/terms/m/market.asp) and source of revenue for a company's product. But that isn't the only benefit. They also allow the producer or seller to guarantee a minimum level of profit for their investment. Since offtake agreements often help secure funds for the creation or expansion of a facility, the seller can negotiate a price that secures a minimum level of return on the associated goods, thereby lowering the [risk](https://www.investopedia.com/terms/r/risk.asp) associated with the investment.

Offtake agreements may provide a benefit to buyers as well, functioning as a way to secure goods at a particular price. That means prices are fixed for the buyer before they are [manufactured](https://www.investopedia.com/terms/m/manufacturing.asp). Doing this may act as a hedge against future price changes, especially if a product becomes popular or a resource becomes scarce, causing demand to outweigh supply. It also provides a guarantee that the requested assets will be delivered: fulfillment of the order is considered the seller's obligation under the terms of the offtake agreement.

## Can Parties Break an Offtake Agreement?

Offtake agreements are legally binding financial contracts, which means that both parties are obligated to live up to their promises. Most contracts include provisions if one party must back out. For instance, they may negotiate and cancel the contract if one party pays the other a penalty or fee.

These agreements may also be canceled in the event of unforeseen circumstances under force majeure clauses. The liability of one or both parties is removed under certain circumstances, such as natural disasters, pandemics, and/or conflicts.

## What Is a Supply Chain?

The term supply chain refers to a network of entities involved in the creation and delivery of a product or service. This chain begins with those who produce and supply raw materials to producers and ends with the entities who deliver goods to the end user or consumer. The supply chain includes producers, suppliers, and retailers. It also includes warehousers, transportation companies, and distributors.

## What Is a Force Majeure Clause?

A force majeure clause is a provision included in many contracts that absolves one or more parties of their liability in the event of an unforeseen circumstance. These acts, which are commonly referred to as acts of God, including natural disasters (earthquakes, floods, hurricanes, and wildfires), conflicts (war and terrorist attacks), and pandemics.

## The Bottom Line

Offtake agreements play a crucial role in project financing by providing producers with the assurance of future sales, often before production begins. This contractual security helps sellers secure financing for capital-intensive projects and potentially stabilize cash flow. Buyers, on the other hand, can lock in prices and guarantee a supply of goods, hedging against future market volatility. These agreements are particularly valuable in volatile markets like energy and natural resource development. Despite being legally binding, parties can negotiate their way out of these contracts under unforeseen events or by paying a termination fee.