Advance Commitment

Posted in Marketing and Strategy Terms, Total Reads: 701
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Definition: Advance Commitment

It is the obligation to take some action in future. If two parties have an advance commitment, they have an obligation to each other to carry out a task as per the rules laid out by both the parties in advance.


For Example: Farmer’s agreement to sell its produce at a pre-decided price to food distributor. Advance commitment gives farmer the confidence that all his produce will be sold at a competitive price and also protects him from any losses. On the other hand it gives a definite procurement source to the food distributor. So both the parties drive some benefits out of it.


Various financial institutions also make contractual agreement with their clients to lend them money at a future date on terms agreed upon in advance.


Commitment is of two types:

Firm commitment: It is absolutely mandatory for the moneylender (For e.g. Bank) to fulfill the commitment under any scenario.

Conditional commitment: It is binding only if certain terms are met in the future. A lender has an option to move out if there is any violation of terms and conditions initially set. For e.g.: The banks can deny lending money if borrower doesn’t meet the set criteria of creditworthiness.

 

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