How Construction Loan Draws Actually Work (And Why Investors Run Out of Cash in Month Two)

Most first-time ground-up borrowers assume a construction loan works like a purchase loan: sign at the table, money hits the account, go build. It doesn't work that way, and the gap between that assumption and reality is where budgets die.

The Land Comes First, the Build Comes in Pieces

At closing, you typically receive funds for the land or lot acquisition. The construction budget — the larger number — sits in a holdback account controlled by the lender. You don't get it up front. You earn it in stages as the work gets completed and verified.

What a Draw Schedule Looks Like

A typical residential build gets broken into five to eight draws tied to milestones:

• Site work, excavation, foundation
• Framing and roof dry-in
• Mechanicals — plumbing, electrical, HVAC rough-in
• Drywall, insulation, exterior finish
• Interior finishes, fixtures, flooring
• Final — punch list, certificate of occupancy

Each draw releases only after an inspection confirms that stage is actually complete. Not started. Complete.

The Part That Catches People: You Fund It First

This is the single biggest cash flow mistake in ground-up construction. You pay your framer, then you request the draw, then the inspector comes out, then the funds release. That cycle is usually 3–7 business days from request to wire.

Which means you need working capital to float at least one full stage of construction — on top of your down payment and reserves. An investor with $180,000 in a construction holdback and $4,000 in the bank is not funded. They're stalled.

How to Keep the Build Moving

• Front-load your reserves. Budget liquid cash equal to your largest single draw stage. Framing is usually the one that hurts.
• Request early. Submit the draw when the stage is 90% done and the remaining work will finish before the inspector arrives. Don't wait for perfection.
• Photograph everything. Time-stamped progress photos speed up inspection scheduling and settle disputes about percent complete.
• Keep lien waivers current. Unsigned waivers from subs will freeze a draw faster than incomplete work.
• Don't let your GC front the money. Contractors who float your project will either quit or price that risk into the next change order.

Contingency Is Not Optional

Build a 10–15% contingency into the budget before you submit it. Lenders fund against the approved budget — if you underbudgeted and the real number comes in higher, that overage comes out of your pocket, not the holdback. Overages mid-build are the number one reason ground-up projects go sideways.

Construction lending rewards operators who plan cash flow as carefully as they plan the build. Get the draw schedule right and the loan works exactly as designed.