What is Future Advance
A future advance is a clause in a mortgage which provides for additional availability of funds under the loan contract. If a future advance clause is included in a loan contract then the borrower can rely on obtaining funds from the lender under the terms of the contract without being required to obtain another loan for additional funds. Future advance clauses may or may not have certain contingencies which make the borrower eligible for future advances.
BREAKING DOWN Future Advance
A future advance can be a consideration for a variety of loan products. In general, the concept of revolving lines of credit is built on the expectation of available funds for futures advances. Future advance clauses may also be integrated into non-revolving loans allowing borrowers to segregate the funds they have been approved for in order to save on interest rate costs and manage cash flows.
In a revolving credit account the borrower can access funds up to a specified limit at any time. Revolving credit accounts can be either credit card or line of credit account. In each type of account the borrower relies on revolving outstanding funds in the account rather than obtaining a principal amount in a lump sum.
Revolving credit accounts will also typically have provisions for cash advances. Generally lenders will set a specific cash advance limit for the account which allows the borrower to directly withdraw cash for a small cash advance fee.
Future advance clauses are often included in non-revolving business loans. Businesses may require future advance clauses to support construction development or ongoing capital investment projects. Business loans with future advance clauses may also be known as term loans.
Similar to a revolving credit account, a term loan will provide a borrower with a maximum credit limit. This allows a borrower to rely on an approved principal amount from a specific loan product.
Construction companies will commonly use term loans with future advance clauses to obtain funds at various points throughout construction development. Construction companies building in large development complexes may also be able structure future advance loans with certain provisions that can integrate real estate collateral on individual tracts of land as building construction is completed.
Businesses may also qualify for term loans to fund long-term growth products. Many lenders working with businesses will structure future cash advances to be dependent on meeting certain milestones. Milestones may include meeting certain estimates for sales growth, revenue or earnings.
Commercial lending deals may also allow for reevaluation of credit terms or broadened principal balances of an undetermined amount. Commercial lenders may integrate loan provisions that allow for reevaluation after a specified period of time. This gives incentive to borrowers to maintain good credit relationships with business lenders in order to potentially receive additional funding from the same lender in the future.