Posted on: 17 July 2023Share
When it comes to international project financing, offtake agreements often play a pivotal role in mitigating risks and attracting investors.
If you're an overseas entrepreneur, understanding more about offtake agreements and how they work can help you obtain the funds you need to get your company off the ground or expand its product lines.
What's an Offtake Agreement?
In essence, an offtake agreement is a contract between a project developer and a buyer who wants whatever the project is eventually designed to create, whether that's products or services. They may be negotiated years in advance, long before a project has begun. Through them, the developer gets the security of a ready market for their goods or output, while the buyer can get a lock on a price and a guaranteed supply.
For example, imagine that you operate a mining company that's discovered a fairly valuable mineral resource, Mineral X, that may have a use in the tech industry. Unfortunately, the mineral vein is located in a very remote area, so a mining operation will be a big investment. You need reassurance that there will be a ready buyer for whatever you produce in order to get 100% project financing.
If there is a company that has technology in the works that can make use of Mineral X, you can enter into an offtake agreement where the buyer agrees to purchase a certain amount of what you produce for a set period, at a set price. You and your buyer both get a guarantee: You gain a ready market, and your buyer gains a ready supply of what they want.
It's important to understand that offtake agreements are sometimes negotiated years in advance, even while projects are still in the planning stages.
How Do Offset Agreements Encourage Investors?
Offset agreements are largely about mitigating risks for everyone involved, but they're particularly useful when you need to attract investors who are willing to fund your project. By securing a committed buyer for your future production, you end up enhancing the project's overall financial profile and limiting the consequences of any volatility in the open market, which is something investors favor.
Overall, offset agreements benefit both project developers and buyers, while simultaneously increasing the "bankability" of the whole endeavor since there's no question about whether or not the product will have a market. That can make it much easier to obtain the financing you need to move forward toward your goals.
Contact a professional for more info.