Construction Line of Credit: Draw Schedule and Repayment Terms
Introduction
A construction line of credit is a flexible financing tool that allows contractors, builders, and developers to access funds for materials, labor, permits, and other project-related expenses. Understanding the draw schedule and repayment terms is essential for effective cash flow management and minimizing borrowing costs. Proper planning ensures that funds are used efficiently, interest charges are controlled, and projects stay on schedule.
What Is a Draw Schedule?
A draw schedule is the plan or schedule for withdrawing funds from a construction line of credit. Lenders often structure draws according to project milestones or specific expense needs. This helps ensure that borrowed funds are used efficiently and that the lender can monitor the loan’s purpose and risk.
Common Features of Draw Schedules:
- Milestone-Based Draws: Funds are released upon completion of predefined project stages (e.g., foundation, framing, roofing).
- Percentage of Project Cost: Lenders may release a percentage of the total approved credit limit based on project expenses incurred.
- Periodic Draws: Some credit lines allow borrowers to draw funds at regular intervals (weekly or monthly) to cover ongoing costs.
Draw schedules help contractors plan cash flow, prevent overborrowing, and keep the project on track financially.
How to Use a Draw Schedule Effectively
- Plan Ahead: Align draws with expected expenses for labor, materials, permits, and subcontractors.
- Draw Only What You Need: Interest is charged only on the drawn amount, so avoid unnecessary borrowing.
- Document All Draws: Maintain detailed records of how funds are used to simplify reporting and audits.
- Coordinate With Contractors and Suppliers: Ensure funds are available when payments are due to prevent delays.
Understanding Repayment Terms
Repayment terms define how and when the borrowed funds must be repaid. Construction lines of credit are usually short-term and designed to cover working capital rather than long-term investments.
Key Components of Repayment Terms:
- Interest-Only Payments: Some lines of credit require only interest payments during the draw period, with the principal due at the end.
- Principal and Interest Payments: Other lenders may require both principal and interest payments monthly or quarterly.
- Revolving vs Non-Revolving:
- Revolving: As you repay borrowed funds, your available credit is replenished, allowing multiple draws.
- Non-Revolving: Once funds are repaid, the line is closed and cannot be reused.
- Revolving: As you repay borrowed funds, your available credit is replenished, allowing multiple draws.
- Term Length: Typically 6–24 months for short-term project financing, though some lenders offer longer terms for multi-phase projects.
Tips for Managing Repayment
- Budget for Interest Costs: Include interest in your project budget to avoid surprises.
- Repay Promptly: Paying down balances as soon as project income is received minimizes interest charges.
- Avoid Overextension: Ensure repayment schedules align with your cash flow to prevent late fees or penalties.
- Communicate With Your Lender: If repayment issues arise, early communication may allow for flexible adjustments.
Example of a Draw and Repayment Scenario
Imagine a construction firm has a $500,000 line of credit for a commercial project:
- Draw 1: $150,000 for foundation work (Month 1) – interest starts accruing immediately.
- Draw 2: $200,000 for framing (Month 3) – interest applies only to the drawn amount.
- Repayment: Make monthly interest payments on the outstanding balance and repay principal when client payment is received (Month 6).
This approach keeps interest costs low while ensuring funds are available when needed.
Conclusion
A construction line of credit is only as effective as your understanding of its draw schedule and repayment terms. Planning draws according to project milestones, borrowing only what is necessary, and aligning repayment with cash flow ensures efficient use of funds, minimizes interest costs, and keeps projects on schedule. By managing draws and repayments carefully, contractors can leverage their construction line of credit as a strategic tool for financial stability and project success.
