Understanding the Draw Process in Private Lending

Understanding the Draw Process in Private Lending

If you’re using a private loan for new construction or a major rehab, you’ll likely come across the term “draw process.” It may sound technical, but in reality it’s a structured way to make sure funds are released fairly, safely, and in line with your project’s progress.

Ashley Wharton, Post Closing Manager at Coastal Equity Group, explains it simply: “Before the loan closes, we hop on a call with the borrower to break down our draw process and answer any questions they may have. Once the loan closes, we send out a post-closing packet which further explains and reiterates the process. Once we have a building permit in hand, the borrower can pull their first draw.” The post-closing packet explains how draws work, what’s required, and how to keep the project moving smoothly.

So, what does that actually mean for you as a borrower? Let’s break it down.

What Is a Draw?

A draw is essentially a reimbursement of funds based on work that’s already been completed on your property. Rather than funding the full construction budget upfront, we release funds in stages as the project moves forward. This helps keep the project steadily moving and minimizes interest payments throughout the life of the loan. 

As Ashley notes, “We cannot reimburse a line item until the work is done. For example, if someone paid $50,000 deposit for lumber, we won’t be able to give them that $50,000 until the house is actually framed.”  This approach protects everyone: the borrower, the contractor, and the lender.”

How the Draw Process Works

According to the Post Closing Guidelines, here’s what you can expect:

• Requesting a Draw: Borrowers email the Post Closing Manager, Ashley Wharton with their request. For tangible costs, things you can see on site like framing, drywall, or flooring, an inspection is required.
• Inspection: An independent inspector will visit the property within 48 hours of your request. Their report helps determine how much of the budget is eligible to be released.
• Timeline: Once the inspection is complete, funds are typically released within 5-7 days. Ashley explains, “It can take about seven days from the time the borrower emails me to the time funds are in their account.”
• Costs: There’s a $175 inspection fee per draw for projects under $2 million ($275 over $2 million). Borrowers often schedule two to four draws over the course of construction to manage these costs.
• Soft Costs vs. Tangible Costs:
• Soft costs (permits, architectural fees, insurance, survey fees) require a paid invoice for reimbursement—no inspection needed.
• Tangible costs (appliances, flooring, paint, framing, drywall) require inspection since they’re tied to visible work on site.
• Permits and Final Sign-Offs: You’ll need a building permit before the first draw. For new construction or a heavy rehab flip, a Certificate of Occupancy is required before the final draw is released.

Protecting All Parties with Lien Waivers

To keep things transparent, every draw includes a lien waiver. Ashley explains: “It’s good for the borrower, the General Contractor, and us because all parties are on the same page for funds released.” This document ensures contractors and subcontractors are properly paid and no unexpected liens get attached to the property.

Managing Loan Extensions

Sometimes projects take longer than expected. That’s where extensions come in. Loan terms typically run 12–18 months, but borrowers can apply for extensions in 1, 3, or 6 month increments. Extension fees vary, but they allow you to finish strong without defaulting on your loan. They typically range 0.50%–1.50% of the loan amount for a 1-3 month extension and 1.50%-3.00% of the loan amount for a 6 month extension.

Why the Draw Process Matters

The draw system isn’t just about protecting the lender, it’s about setting you up for success. By aligning funding with project milestones, it ensures contractors are paid for completed work, keeps budgets on track, and provides accountability for everyone involved.

As Ashley sums it up: “Draws are based off work completed”. The process keeps projects moving and gives borrowers confidence that funds will be there when the job is done.

Understanding how the draw process works helps you plan ahead, budgeting for inspections, keeping invoices organized, and coordinating with contractors. The more prepared you are, the smoother your project will go from closing to final payoff.

If you’re planning a construction or rehab project and want to learn more about how draws work in private lending, start by reviewing your closing packet and speaking with your loan team. Having clarity up front makes all the difference in getting your project completed on time and on budget.

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