Draw Processing: Why Lenders and Borrowers Disagree
Lenders want to release a draw request as quickly as possible. Why? Because a construction loan does not start accruing interest until the funds are disbursed. On the other hand, borrowers want money to pay vendors and contractors as quickly as possible. Everyone has the same incentive: to approve a draw request as quickly as possible. And everyone benefits from faster payments.
So it surprised us when we recently surveyed construction lenders and borrowers and found they fundamentally disagreed on how much time it takes for a draw to get funded. According to our responses, we saw that lenders reported an average of 5.5 business days to process a draw, while borrowers reported 9.4 business days.
Now, lenders always say they want to process the draw as quickly as possible and often commit to 1, 7 or 10-day turnarounds. But the difference of over 70% in responses made us question if there was something wrong with our survey.
So we came up with a few hypotheses:
- Was the question framed poorly?
- Did lenders and borrowers view the inspection as part of this time?
- Was there a discrepancy in perception?
Was the question framed poorly?
In any survey, it is possible that the survey itself was flawed…everyone makes mistakes right? So we dug into the questions. Here’s what we asked lenders:
It typically takes how long to fund the draw from initial submission?
And this is what we asked developers:
It typically takes how long to get my draw approved from my initial submission?
So the questions were described similarly enough that we determined that the survey itself was not flawed.
What about the inspection?
After we spoke with a number of borrowers and lenders, they all agreed that the inspection was the biggest variable (and least controllable) part of the draw process. But both parties agreed that the inspection was a part of the time it took to process the draw. As such, the difference in survey results was not the fault of the inspection report.
Was there a discrepancy in perception?
As we talked with our lenders and borrowers, we finally found the issue in the perception of “initial submission.” Almost all lenders agreed that when a draw is initially received it takes a few days of back and forth to receive or get a “variance” for missing docs. Say a lien release from the plumbing subcontractor is missing. It typically takes a few days to catch that it’s missing and then request it be sent. Sometimes the lender will begin processing the draw knowing this document will be received later, but sometimes they will wait until all documents are received or a “complete draw submission." It is these days of back and forth that we found most responsible for the difference in perception from processing time. Often, a construction loan administrator will spend a few additional days getting the documents together with the borrower prior to draw being officially submitted to for funding.
Conclusion
The primary difference in draw processing time perception is the fact it often takes a few days for the draw to go from a “initial submission” to a “complete draw submission.” These days can cost lenders precious interest and cause borrowers countless headaches with vendors.
With draw software, all initial submissions are complete draw submissions significantly cutting back on these costly days of back and forth. Using a construction finance software like Rabbet, draw processing time for both borrowers and lenders can be improved by ensuring a complete draw submission on the first submission, every submission.
