How Construction Draws Actually Work

A construction loan is not a lump sum. It is a commitment to advance money in instalments as work is completed and verified, and the sequencing shapes the whole project.

The draw sequence

The borrower requests a draw covering work completed since the previous request, supported by invoices, lien waivers from contractors and often a sworn statement of progress.

An inspector engaged by the lender visits the site and confirms that the work claimed has actually been done, since payment is against completion rather than against schedule.

The lender then funds, usually less a retainage percentage held back until the project is finished, which gives the contractor an incentive to complete the final items.

Why the borrower is always ahead

Because draws reimburse completed work, contractors and suppliers are typically paid before or around the time the lender funds. Somebody has to carry that gap.

Lenders also commonly require the borrower's equity to be spent first, so the early stages of a project run entirely on the owner's own capital before any advance arrives.

This is why working capital beyond the equity requirement matters. A project can be fully funded on paper and still stall because the borrower cannot bridge a draw cycle.

Interest is charged on what is drawn

Interest accrues only on the outstanding balance, so carrying cost builds gradually as the project progresses rather than applying to the full facility from day one.

Many construction loans include an interest reserve, an allocated portion of the loan used to pay interest during the build when the property produces no income.

If the project runs long, the reserve can be exhausted before completion, at which point interest becomes an out-of-pocket cost during the period when cash is tightest.

Change orders and the budget

The loan is sized against a specific budget with line items. Moving money between lines usually requires lender consent, because the budget is part of the underwriting.

Change orders that increase total cost generally require additional borrower equity rather than a larger loan, since the loan-to-cost test was set at closing.

Contingency lines exist for this reason, and lenders scrutinise how quickly they are consumed. Early contingency use is treated as a signal about the estimate rather than routine.

The exit has to be arranged

Construction loans are short-term by design and mature soon after completion. Repaying them requires either a sale or a longer-term loan that replaces them.

Permanent financing is generally sized against the completed property's income, which means the project must not only be built but also leased to the level the takeout lender requires.

The interval between physical completion and stabilised occupancy is where construction projects most often run into trouble, because the loan matures on a schedule that leasing does not follow.