Guide
How Construction Loans Work
Construction financing doesn't work like a normal loan. Money is released in stages as the work gets done — here's the full process, explained.
With a standard business loan you get the full amount up front. A construction loan is different: the lender commits to a total, then releases it in pieces called draws as your project hits milestones. You pay interest only on what's been drawn, not the whole commitment.
That structure protects everyone. You're not paying interest on money you haven't used yet, and the lender isn't funding a building that might never get finished. Understanding the mechanics helps you plan cash flow and avoid surprises.
Draw-based
Funds release by milestone
Interest-only
During the build period
Per-stage
Inspections before each draw
Exit
Sale or permanent refinance
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What is a draw schedule?
A draw schedule is the agreed plan for releasing loan funds in stages — for example foundation, framing, mechanicals, drywall, and final finishes. Each stage releases a set portion of the loan once the work is complete.
How draws and inspections work
Before each draw, the lender sends an inspector (or reviews documentation) to confirm the stage is actually finished. Only then is the next tranche released, usually directly to you or sometimes to subs and suppliers.
Interest-only during construction
While building, you typically pay interest only on the amount drawn so far. Your payment grows as more is drawn, then converts to full principal-and-interest payments once the project completes or you refinance.
The exit: what happens at completion
Construction loans are short-term. When the build is done you either sell the property to repay the loan or refinance into permanent financing. Lenders evaluate this exit before they ever fund the project.
How to prepare for approval
Have a detailed budget, realistic timeline, your general contractor's credentials, and a clear exit plan. The stronger your numbers and experience, the better your rate and the smoother the draw process.
Frequently Asked Questions
What is a construction loan draw?
Do I pay interest on the full loan during construction?
How many draws does a construction loan have?
What happens when the project is finished?
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