A draw schedule is the structured timeline that governs how and when a construction lender disburses loan proceeds during the construction period. Instead of funding the entire balance at closing, the lender advances funds in increments called draws as the borrower completes predefined milestones, aligning the lender’s capital exposure with the value actually being created on site.
What does each draw request require?
Each draw request typically requires third-party inspection, budget reconciliation, lien waivers from subcontractors and documentation that the project remains on schedule and within budget. Lenders typically hold back a retainage, often 5% to 10% of each draw, until substantial completion. Many also require the borrower’s equity to be fully contributed before any loan draws commence, a structure known as “equity first.”
If construction costs exceed the original budget, the lender will usually require the borrower to fund the overage from equity before releasing the next draw. The draw schedule protects the lender against funding a project that stalls before completion, and it is the mechanism through which a construction loan turns a commitment into an outstanding balance.
Why do draw schedules create cash flow risk for borrowers?
Delays between a draw request and lender approval create cash flow gaps, which is why experienced developers maintain working capital reserves or lines of credit to bridge timing mismatches. Tracking draws against the original budget is critical: cost overruns discovered late in the project can create serious capital shortfalls.
How draw schedules show up in LoanBoss
Draws are entered based on the day they are actually made and flow into each loan’s cashflows, and LoanBoss tracks draw-by-draw progress against budget projections across multiple construction projects at once.
Frequently Asked Questions
What is retainage on a construction draw?
A portion of each draw, often 5% to 10%, that the lender holds back until substantial completion.
What does “equity first” mean?
The borrower’s equity must be fully contributed to the project before the lender funds any draws. The lender’s money goes in last.
What happens if the project goes over budget?
The lender will usually require the borrower to fund the overage from equity before releasing the next draw.
Related Terms
- Construction Loan
- Escrow
- Good-News Money
- Bridge Loan
- Construction Loan Draw Tracking for Real Estate Developers: The Borrower’s Side
- Escrows, Reserves and Repair Schedules: Tracking Post-Closing Obligations on CRE Loans
Part of the LoanBoss CRE Debt Glossary. For hedging-specific terms, see Pensford’s resources.
Sources
- LoanBoss CRE Debt Glossary