Glossary·Written by a CPA
Take-or-pay contract
Also called: Take or pay
A contract where the buyer owes the money whether they use what they ordered or not.
Take or pay basically just means you either take what you ordered or you pay for it anyway.
It's like signing a long lease on a building. If business slows down and half of it sits empty, the rent is still due.
For you, these show up as big purchase commitments in the filings, and they can turn a slowdown in growth into a cash problem fast.
Example. As an example, if a company commits to $10 billion a year of computing power on take-or-pay terms and only needs $6 billion of it, it still owes the full $10 billion.
The catch. Compare what's due over the next 12 months with the company's revenue over the last 12 months. The bigger that bill is next to sales, the more the growth has to keep going.
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This is education, not tax or investment advice. I'm a CPA, but I'm not your CPA. Full disclaimer.