When a business-purpose loan funds a ground-up build or a major renovation, the lender usually does not hand over the full construction budget at closing. Instead, money is released in stages as work is completed. This process is called a draw schedule, and understanding how it works can help a borrower plan cash flow and avoid surprises during the build.
What a draw schedule is
A draw schedule is a plan that breaks the construction budget into stages, often tied to specific milestones such as foundation, framing, rough mechanical work, and finishes. Each stage has a dollar amount attached to it. As the borrower completes a stage, they request a draw, which is a release of funds from the loan to pay for that portion of the work.
The schedule is usually set up before closing and is based on the construction budget and timeline the borrower submits. Because every project is different, the number of draws and the amount tied to each one will vary by deal.
How a draw is requested and reviewed
To request a draw, a borrower typically submits documentation showing what work has been completed, such as invoices, receipts, or a contractor's application for payment. Many lenders also require a third-party inspection to confirm that the work described has actually been done before releasing funds.
The inspection step exists to protect both the lender and the borrower. It confirms that money is only released for completed work, which helps keep the project on budget and reduces the risk of funds being used for something other than the intended construction stage.
Interest on funds drawn
In most construction loans, interest is charged only on the portion of the loan that has actually been drawn, not on the full loan amount approved at closing. This means a borrower's interest cost can grow as more draws are taken throughout the project.
Because interest is tied to drawn funds, the pace of construction and the timing of draw requests can affect overall carrying costs. This is one reason a realistic draw schedule and timeline matter from the start of the project.
Retainage and holdbacks
Many draw schedules include a retainage, sometimes called a holdback. This is a portion of each draw, often a percentage, that the lender holds back rather than releasing in full. The retainage is typically paid out later, once a later stage of construction or the entire project is complete and confirmed.
Retainage gives the lender additional assurance that work will be finished to the standard described in the plans before all funds are released. Borrowers should factor retainage into their cash flow planning, since it means less money is available upfront at each draw than the stage budget might suggest.
What can slow a draw down
A draw can be delayed for several reasons. Incomplete documentation, such as missing invoices or an unclear description of completed work, is a common cause. Inspection scheduling can also add time, especially if an inspector needs to visit the site before funds are approved.
Changes to the scope of work, unexpected cost overruns, or work that does not match the original plans can also slow a draw while the lender reviews the change. Keeping documentation organized and communicating changes early can help keep the process moving.
How this fits into a ground-up construction loan
A draw schedule is one part of a larger ground-up construction loan structure. The construction program sets the overall loan terms, while the draw schedule governs how funds are released during the build itself. Borrowers working on new construction should expect both pieces to work together throughout the project.
A draw schedule is related to, but not the same as, a rehab budget and draw schedule used for renovation projects. Ground-up builds often involve more stages and inspections because the project starts from the ground rather than an existing structure.
Common questions
How many draws are typical in a construction loan?
The number of draws depends on the project and the lender's structure. Some projects use a handful of draws tied to major milestones, while others break the budget into more stages. The specific schedule is usually set based on the construction budget and timeline submitted for the project.
Does the borrower pay interest on the full loan amount right away?
In many construction loans, interest is charged only on funds that have been drawn, not on the full approved loan amount. This means interest costs can increase over time as more draws are taken.
What is retainage in a draw schedule?
Retainage is a portion of each draw that the lender holds back instead of releasing in full. It is typically paid out later, once additional construction stages or the full project are confirmed complete.
What slows down a construction draw?
Common causes of delay include incomplete documentation, inspection scheduling, and changes to the scope of work that do not match the original plans. Keeping records organized can help avoid some of these delays.