Take-or-pay contract
What is a take-or-pay contract, and why does a lender value it?
ONE OF 366 TERMS · FREE · NO SIGNUP
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
A take-or-pay contract obliges a buyer to pay for a minimum quantity of goods or capacity each period whether or not it takes delivery. For the seller it turns part of revenue into a contracted floor: a plant earning US$10m a year with 70% of its output under take-or-pay has about US$7m that does not depend on demand. A lender usually checks three things: the buyer's credit, because the floor is only as good as the payer; the termination and force majeure clauses; and whether the price is fixed or resets, since a floor repriced to market protects volume but not margin.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
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- 5 Cs of credit
- Second way out
- Customer concentration
- Bankability
- Risk grade
- Primary source of repayment
- Serviceability
- Policy exception
- Credit committee
- Key-person risk
- Connected exposure
- Supplier concentration
- In-principle approval (approval in principle)
- Serviceability buffer (assessment rate)
- Single-name limit
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