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.