In this Article…

• Learn the basics of construction loans.
• Find the essential checklist for managing construction loan payments and requests.
• Discover other best practices for managing construction loan payments.

Disclaimer: The information provided in this article is for educational purposes only and should not be considered legal or financial advice. For any financial concerns or questions regarding construction, please consult a qualified legal or accounting professional.

Being a home builder means dealing with an avalanche of paperwork. This is especially true when it comes to managing the construction loan payments that keep your projects moving forward.

Draw requests–a vital component of the construction loan process–hit you with another wave of documents that you must prepare, review, and approve. There can be so much paperwork, in fact, that according to Flex, “Depending on the size and complexity of the construction job, the draw request [‘package’] can have anywhere from 20-500+ documents involved.”

Clearly, being organized and having a strategy to navigate construction loan payments is essential. In this article, we’ll guide you through the basics of construction loans, the essential checklist steps to manage your construction loan payments, and the best practices for construction loan payments that will keep your projects on track.

Understanding Construction Loan Fundamentals

Some of the ways for builders to improve their cash flow can be things like negotiating favorable contracts with subcontractors and suppliers and working on a reserve fund. Yet one of the most efficient options to improve it, is changing the way you approach construction loan payments, since those are critical for keeping cash flow moving. But if you're still using:

• Manual invoicing (slow processing & errors)
• Bank transfers (long wait times & paperwork)
• Paper checks (even more delays & lost payments)

You’re losing valuable time. Payment delays mean:

• Covering costs out of pocket
• Project slowdowns due to funding gaps
• Struggling to meet payroll & pay subcontractors

The Solution? With the right tools,like digital invoicing and instant payment access, you can:

• Speed up construction loan payments
• Improve cash flow and keep projects moving
• Avoid unnecessary delays & financial stress

Learn about these strategies for enhancing cash flow in the Truss article, “Real Estate Developer Cash Flow: 6 Strategies to Optimize Accounting & Payments.”

While both a traditional mortgage and a construction loan will have a third-party lender involved, the two types of financing differ. Mainly, for a construction loan to fund a new home build, the lender will disburse payments over time rather than providing a lump sum payment like a mortgage.

These payment phases are known as draws and the entire approach is designed to minimize risks for the lender and ensure that your business is using the funds for the intended construction purposes.

Though, it isn’t just the lender who benefits from the construction loan draw and payments structure. Rather than waiting until the final completion of a home build to receive payment, your construction business gets an infusion of much-needed cash flow throughout a project’s timeline. This keeps your business solvent, growing, and moving forward.

Key Aspects to Know for Construction Loan Draw Requests

• The construction loan disbursement process is tied to project milestones.
• The milestones are measured in one of two ways:
  
  • 1. Completion percentages.
    
    • Often 25%, 50%, 75%, and 100%.
  • 2. Construction phases.
    
    • These phases could be the completion of foundation work, framing, roofing, and the interior.
• Builders or homeowners must request these funds.
  
  • The requests are known as draw requests.
• When the funds are provided, and how much funds are provided, is determined by the draw schedule that was agreed upon earlier with the lender.

The Builder’s Checklist for Managing Construction Loan Payments Effectively

‍Don’t confuse construction loan draw requests with construction payment applications.

While similar, draw requests for a construction loan are only sent to a lender. Construction pay applications, on the other hand, may be sent from a builder to a homeowner, a construction manager, or investors, instead of a lender. Though pay applications can be sent to a lender as well.

Learn more about submitting an application for construction payment in this Truss article.

Now that you understand the basics of construction loans and payments, let’s look at the steps you need to follow in order to manage your business’ construction loan payments effectively and efficiently.

1. Develop a Detailed Draw Schedule

A detailed draw schedule should be a financial roadmap, aligning with your business’ cash flow, your client’s desired deadline, and the lender’s needs.

Here are some tips to help you develop a draw schedule that supports your project’s success and benefits all parties involved:

• Take your project and divide it into clear phases or milestones.

• For instance, the completion of the foundation would be phase one.

• Label each phase with a realistic percentage of completion.

• Completing the foundation would be 25% of the entire project.

• While it can be difficult to predict what prices will be in the future when markets fluctuate so much, ensure that the draw amounts you will request during each phase can cover your actual expenses.

• That brings us to the next tip: incorporate financial buffers.
  
  • Factor in unexpected delays and cost increases.
• Ensure that the draw schedule will allow you to meet payment obligations to your subcontractors.

• Find balance with your draw requests.

• Too few draw requests can be problematic for your business’ cash flow.

• Too frequent draw requests can create unnecessary administrative headaches and even cause delays to payments and the project.

2. Document Everything Meticulously

Document, document, document.

To get paid, you need to make thorough documentation of everything that is relevant to draw requests. These documents include:

• All loan-related paperwork and signed agreements.

• Cost breakdowns for every phase of the home construction project.

• Copies of all permits and inspection reports.

• All of your invoices and payment receipts with your subcontractors.

• Any change orders that occur to the project and how those orders altered the project costs.

• Photos of the progress that are labeled with the project phase and the date.

• All communications you had with lenders and inspectors.

3. Understand Lender Requirements

In conjunction with meticulous documentation that will assist you when submitting a draw request to a lender, ensure that you are meeting the lender’s specific requirements for approval of a construction loan payment.

These requirements can include:

• Forms, as well as specific formats they must be submitted in.
• Supporting documentation, as stated above.
• Inspection schedules and the lender’s protocols for those inspections.
• Timeframes for each draw request and processing the payments.
• Fees for inspections or disbursements.

4. Prepare Comprehensive Draw Requests

With your detailed documentation and understanding of the lender’s requirements, it’s time to prepare a comprehensive draw request.

You’ll want to submit the draw request as one complete package to reduce the chances of any potential back-and-forth with the lender and to get your payment approved faster.

Items to include with a draw request submission include:

• The draw request form in the lender's dictated format.

• Current project schedule with the originally planned progress and the actual progress that has been achieved.

• Cost breakdown of your completed work.

• All invoices from your subcontractors and suppliers that are relevant to this project phase and draw request.

• Lien waivers from all parties with their signatures confirming that you have paid them.

• The latest progress photos showing the work your team has just completed.

• Inspection reports or certificates that are relevant to this phase.

5. Anticipate and Prepare for Inspections

Many lenders of construction loans will require inspection of the jobsite before they will release any payment to your business.

To improve the chances of the inspection going well, consider the following tips:

• Be aware of what the inspector will be looking for at each phase.
• If there could be any issues with what the inspector will be focusing on, then address those issues immediately, before the inspector arrives.
• Also address any other issues that you may realize, even if they aren’t relevant to the current phase and draw request.
• Maintain accessibility and ensure that your jobsite is safe for the inspector.
• Have all of your documentation prepared and available on the jobsite.
• Make sure that either you or a trusted team member is there during the inspection to answer any questions the inspector may have.

6. Implement Strategic Supplier and Subcontractor Payment Terms

Your business’ construction loan payments don’t just affect your cash flow; they provide you with the funds to pay your subcontractors. That means your subcontractors’ cash flow is also tied to your draw request schedule. 

Open communication with your subs about the draw schedule is vital to manage their expectations, help them improve their cash flow, and to maintain your positive working relationships with them.

To align your subcontractors and supplier payment terms with your draw schedule so everyone benefits, try these tips:

• When negotiating payment terms for subs and suppliers, match your payment deadlines with your expected draw dates.

• Just as you’ll be paid in phases, use progress payments for your subcontractors instead of lump sum payments.

• Ensure that your subcontractors are clear on your payment timing.

• Use retention or holdback provisions if necessary.

• Have a backup plan for potential construction loan payment delays and ensure that your subcontractors are aware of potential delays.

• Use a payment platform like Truss Payments, which makes it easy to send payables in minutes.

• Even better, Truss Payments gives you instant access to funds. That means, like satisfied Truss customer Aarow Building, you can go from   receiving payment to paying your subcontractors in five minutes.

7. Establish Cash Reserves or Backup Financing

You may be the most efficient, organized, and ambitious builder out there, but even with all of your skills and best intentions, draw delays can still occur.

Payment delays can affect your project momentum, not to mention meeting your employees’ payroll and obligations to subcontractors. That means you must prepare for draw delays.

Consider using these strategies:

• Maintain a cash reserve to cover any gaps that might appear between draws.

• Establish a business line of credit as emergency financing.

• Build relationships with suppliers who are willing to negotiate favorable terms with you.

• Consider supply chain financing options for the major purchases your business needs to make.

8. Implement Construction Management Software

While slow to adapt to technology, the construction industry is now finding that tech, such as management software, is indispensable. Construction platforms like Procore and Buildertrend, and construction payment platforms like Truss, are streamlining every aspect of building, including construction loan payments.

Use these software platforms to monitor and manage your construction loan payments in the following ways:

• Project budget tracking and forecasting, in real-time.
• Automated documents.
• Streamlined invoicing, approvals, and payments.
• Progress photo management.
• Simplified communication with stakeholders.

For a more in-depth look at the software apps designed for managing every step of construction, from "blueprint to build,” read this Truss article.

9. Utilize Financial Dashboards and Reporting

Many construction management software platforms include accounting features or synchronize with QuickBooks, offering financial reports and insights that can assist with managing your construction loan payments.

Depending on the platform, you can utilize the dashboards and reports to:

• Track planned vs. actual project expenses by category.

• View outstanding invoices and your upcoming payment obligations.

• See your remaining loan balance and available funds.

• Estimate cash flow projections based on your project’s draw schedule.

• Identify potential issues before they escalate by analyzing budget variance.

Truss Payments connects seamlessly with QuickBooks Online, allowing for syncing of payables and receivables between the two platforms.

10. Prevent Documentation Gaps

Incomplete documentation can stop a construction loan payment dead in its tracks. However, incomplete documentation is easily avoidable with these tips:

• Create templates for your business’ commonly required documents.
  
  • This saves time when organizing a draw request document “package” and prevents you from forgetting essential docs.

• Set up a documentation checklist for your draw requests.
  
  • Use this builder’s checklist as a jumping off point. 
    
    • Take the items in this list and expand or customize them to fit your needs.
    • Make your checklist available to every relevant team member.
    • Ensure that everything is checked off before submitting a draw request to a lender.
      
      • While setting this up takes effort upfront, it prevents costly delays in construction loan payments, protecting your cash flow. 

• If you won’t be in charge of managing your business’ draw request documents, then assign another team member and make their responsibility clear.

• Before, during, and after a draw request submission, maintain backups of all of the relevant and critical documents.

11. Manage Change Orders Effectively

Change orders are a pain. Even more so when they disrupt carefully planned draw schedules. To mitigate the impact of change orders on draw requests, utilize these tactics:

• Document all change orders thoroughly and include their cost implications.
• Notify the lender right away of changes.
• Update the draw schedule.
• Secure written approval with signatures from all parties.
• Track the project’s and your business’ overall budget based on the change orders.

12. Address Payment Disputes Proactively

You may do everything in your power to maintain quality working relationships with your subcontractors and avoid payment disputes, but they can still happen.

To avoid a payment dispute with one of your subcontractors from escalating or from happening at all:

• Create detailed scopes of work for each of your subcontractors with clear payment terms.

• Document quality or timeline issues right away.

• Don’t avoid issues; use prompt and direct communication with your subs for all disputes.

• Negotiate with your subcontractors. Partial payments for disputed amounts may be a great compromise.

• Finally, like many steps in this checklist, maintain comprehensive documentation.

Conclusion

By following this builder’s checklist, you can help your business minimize construction loan payment delays, optimize its cash flow, and focus on completing quality home builds instead of dealing with draw request headaches.

Highlights of the key strategies and tips include:

• Thorough documentation for draw orders.
• Preparing for jobsite inspection.
• Utilizing construction management software.
• Managing change orders promptly and effectively.

Truss Payments is the perfect co-pilot for managing your construction loan payments. Achieve a clearer picture of your finances and get instant access to funds to pay for supplies, payroll, and subcontractors. Say goodbye to manual processes and paper checks, and embrace a solution built for construction. Book a demo with the Truss Payments team today.