What does the term 'Draw' refer to in the context of construction loans?

In the context of construction loans, the term 'Draw' specifically refers to the process of accessing funds from the loan. When a borrower secures a construction loan, the funds are not disbursed in a lump sum. Instead, they are made available in stages or 'draws' as the construction progresses. This approach ensures that the lender only releases funds as needed for various phases of the project, promoting careful financial management and helping mitigate risk for both the borrower and lender. Each draw usually corresponds to specific milestones or completion of certain work, allowing for oversight and assessment of progress before additional funds are disbursed.

Understanding this concept is essential for borrowers, as it impacts their cash flow and the management of project expenses throughout the construction process. Knowing when and how draws can be requested helps ensure a smooth project timeline and financial stability.