Legal Definitions - future-advance clause

A future-advance clause is a specific provision included in a loan agreement, often one that involves collateral (an asset pledged to secure the loan). This clause allows a borrower to obtain additional loans or credit from the same lender in the future, and these new loans will be secured by the original collateral that was pledged for the first loan, or by collateral acquired later. Essentially, it creates a framework where the existing security arrangement can cover future borrowing without the need to create an entirely new security agreement each time. This streamlines the process for both the lender and the borrower, making it easier to expand an existing credit relationship.

Here are some examples to illustrate how a future-advance clause works:

• Homeowner and Mortgage: Sarah buys a house and takes out a mortgage. Her mortgage agreement contains a future-advance clause. A few years later, she decides to add a new room to her house and needs to borrow more money for the renovation.

  How it illustrates the term: Because of the future-advance clause in her original mortgage, Sarah can obtain a home equity line of credit (HELOC) from the same bank. This new loan for her renovation is automatically secured by her house, using the existing mortgage as the underlying security instrument, without needing to draft a completely new mortgage document for the HELOC.

• Small Business and Equipment Financing: A startup bakery secures a loan to purchase its initial ovens and mixers. The loan agreement includes a future-advance clause, stating that the ovens and mixers serve as collateral. Six months later, the bakery expands its menu and needs to buy a new, larger freezer and a delivery van.

  How it illustrates the term: The future-advance clause allows the bank to lend the bakery additional funds for the freezer and van. These new assets, along with the original ovens and mixers, are all covered under the same initial security agreement. This simplifies the process and ensures the bank's security interest extends to the new equipment without requiring a brand new loan contract.

• Agricultural Loan: A farmer takes out a loan to purchase a large tract of land for planting crops. The loan agreement includes a future-advance clause, with the land as collateral. Over the next year, the farmer needs additional funds to buy seeds, fertilizer, and a new tractor.

  How it illustrates the term: Thanks to the future-advance clause, the farmer can borrow these additional sums for operational expenses and equipment from the same lender. The original land, along with the newly acquired tractor and even the harvested crops (which might be considered future collateral), all serve as security under the initial loan agreement, streamlining the financing for ongoing agricultural needs.