Glossary › Glossary
A draw structure is the system a hard money lender uses to release renovation or construction funds in stages rather than all at once at closing. Instead of receiving the full rehab budget upfront, the borrower receives funds incrementally as work is completed and verified. Draw structures define how many draws are allowed, what documentation is required, whether there are per-draw fees, and whether the lender holds back a portion of each draw (retainage) until work is fully complete.
Hard money lenders are in the business of collateral-backed lending. When they fund a renovation or construction project, their security is the property — and a half-finished property is worth less than a completed one. Draw structures protect the lender by ensuring that construction funds are released in proportion to verified completed work, not in advance of it.
For the borrower, this means you cannot access the full rehab budget at closing. You must complete work, request a draw inspection, and receive reimbursement or the next tranche of funds before the next phase begins. This requires working capital — the ability to pay contractors and cover materials before the draw is released.
The typical draw process follows this sequence:
1. Work is completed. The borrower or general contractor completes a defined scope of work — a phase of the rehab or a portion of the construction.
2. Draw request is submitted. The borrower submits a formal draw request to the lender, typically including documentation of completed work (photos, contractor invoices, lien waivers from subcontractors).
3. Inspection is ordered. The lender sends a third-party inspector to the property to verify that the claimed work has actually been completed and meets quality standards. Some lenders use their own staff; most use independent inspection companies.
4. Inspection report is reviewed. The lender reviews the inspector's report and approves or adjusts the draw amount based on the percentage of work verified as complete.
5. Funds are released. The approved draw amount (less any retainage) is wired to the borrower, typically within 3-10 business days of inspection approval.
The process then repeats for the next draw.
Lenders vary significantly on how many draws they allow:
Before closing, confirm how many draws are allowed and whether the structure fits your project. Running a 10-phase renovation with only 2 allowed draws means fronting large amounts of capital between draws — a cash flow strain that can stall a project.
Many lenders charge a fee for each draw inspection. Common draw fee structures:
Draw fees are easy to overlook when comparing lenders, but they add up on projects with many draws. A project with 6 draws at $300 each adds $1,800 in costs that do not appear in the rate or points.
Retainage is a percentage of each draw that the lender withholds until the project is fully complete. Common retainage amounts are 10-15% of each draw.
Example: You request a $20,000 draw. The lender approves it but holds 10% retainage — releasing $18,000 now and holding $2,000. After another draw and another hold, you have accumulated $4,000 in retainage. When the project is fully complete and the final inspection passes, the lender releases the full retainage balance.
Retainage serves as additional protection for the lender — if the borrower abandons the project, the lender has not released 100% of the renovation budget. For the borrower, retainage means your working capital needs are higher than the approved draw amounts suggest, because you are always owed money that has not yet been released.
Some lenders do not use retainage. Others apply it only to the final draw. Confirm whether retainage applies and at what percentage before closing.
Draw timeline is the time between submitting a draw request and receiving funds. This matters for cash flow management.
A slow draw timeline on a project with multiple phases can create significant gaps in cash flow — especially if contractors expect payment on completion and the draw has not been released yet. Always ask what the expected draw timeline is and verify with other borrowers who have used that lender.
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