What is a Firm Commitment?

A firm commitment is a promise to take a designated action within a specified period of time. The main uses of the term are described below.

Firm commitment in underwriting. The firm commitment concept most commonly applies to a securities offering, where the underwriter commits to buy all unsold securities. Thus, the underwriter will purchase any remaining portion of the issuance that cannot be placed with investors. This commitment transfers the risk of not selling securities from the issuer to the underwriter. It also presents the underwriter with the opportunity to generate a profit on the difference between the commitment price and the price at which it can then sell the shares to investors.
Firm commitment for a loan. The firm commitment term can refer to a guarantee by a lending institution to issue a loan to a borrower within a fixed period of time, if the loan is requested by the borrower. The lender enters into this arrangement in exchange for an annual fee.
Firm commitment supply contract. In a firm commitment supply contract, a buyer agrees to purchase a specified quantity of goods or materials from a supplier within a set timeframe, regardless of changes in demand or market conditions. This legally binding agreement ensures the supplier delivers the agreed-upon products at predetermined prices and terms, while the buyer is obligated to complete the purchase. Such contracts provide stability for both parties by securing supply chains and predictable revenue, reducing risks of price fluctuations or shortages. Firm commitment supply contracts are common in industries like manufacturing, retail, and food production, where consistent supply is crucial for operations.