Contractor talking with a lender on a job site

Most construction projects are expensive. While a home remodel project might be as little as a few thousand dollars, a commercial project can stretch into the billions of dollars. Unless the project owner has the cash on hand, they’ll need to borrow money to make them happen. While often the key to making the owners’ dreams come true, lenders can cause headaches for contractors. Lenders bring loan draws, lien waivers, and extra scrutiny to a project. But when contractors and suppliers understand how the process works, and follow the lender’s requirements, they can finish the work and collect their payment without a hassle. 

Who are construction lenders? 

Construction lenders are usually banks or credit unions that loan money to help owners with their new construction or remodel projects. There are specialized lenders for residential projects, new homes, commercial projects, medical and dental projects, and pretty much every other type of construction project that exists. Some of them are household names, like Wells Fargo and Bank of America. Others might be little known outside of the commercial construction world, but they make enormous investments in building projects. 

They’re not the enemy: Lenders want contractors to get paid

Lenders always control the purse strings, and they want to make sure that they are getting the best return on their money. As a result, they do everything they can to avoid a mechanics lien or foreclosure on their property. They have a clear interest in making sure that everyone on the project gets paid.

For a contractor, working on a project that has a lender involved is more complicated than when the project owner provides the cash and controls the payments. Lenders are often quite hands-on during the project, sometimes even sending inspectors out to see the progress of the work.

Lenders aren’t all bad though, and a few of them are even a joy to work with – if you know what to expect, and follow their rules. 

Lender requirements for GCs and subs

Contractors on a financed project should expect to submit a lot of paperwork throughout the job. You will need to turn in documents during all phases of the project: Before it starts, while construction is happening, and after the project is complete. Payments will be directly tied to this paperwork, so it’s important to set aside time to complete it and keep it organized.

Before the construction project

Resume

In order to choose a General Contractor for the project, the lender will usually ask for a resume of past work. Some will have a specific form they want you to fill out, while others will be less formal. Basically, the lender wants to make sure that the GC will complete the project and do a good job. 

The lender may also request financial records to ensure that the contractor they hire is financially stable. In some cases, lenders may require a payment bond on the project. Provide all the documents they request the first time, as it saves time in closing the loan, which means the project can get started sooner and you can get paid quicker.

Lenders have the right to approve subcontractors as well. Most banks will ask for a list of subcontractors before the project starts and will let the GC or the owner know if they have an issue with any of them. The Lender may require the GC to change subs if they uncover past problems, they are unlicensed, or uninsured. 

Assignment of Contract

Before closing on the loan, the construction lender will ask the GC and the owner to sign a document that entitles the bank to act as the owner during the project. The lender takes on all the rights of the owner, as spelled out in the contract. This document also gives the bank the right to take over the contract if the owner defaults. The lender can then force the contractor to finish the project if it thinks it is in its best interest to do so. Read this document carefully so you know your rights and responsibilities if this happens.

During the construction project

Pay apps and loan draws

If required by the contract, GCs and subcontractors will need to fill out a pay app, short for “payment application.” It is basically what it sounds like: An application to get paid. And similar to filling out a job application, you’ll need to include evidence that shows why you deserve payment. The pay app will typically ask for:

Submitting loan draws, or draw requests, can add a layer of difficulty when working with a lender. Contractors should read the lender’s draw requirements and procedures carefully, and collect any forms the lender requires. Read the instructions carefully and don’t try to cut corners. Trying to save time may only delay your payment. Subcontractors should ask the GC for any forms they may need to complete ahead of time. Most lenders will send an inspector out to verify the work has been done.

Joint checks

Some lenders will require the use of joint checks. A joint check is made out to two (or more) parties, and requires both of their signatures. They are used to ensure that lower tier subs and suppliers get paid. Joint checks require the hiring party (often the GC) to endorse them before the check can go to the sub for cashing. They are effective, but can be an accounting challenge for a GC. They can require that you set up fake clearing accounts in your accounting software, so you can deposit and write checks out of the fake account for that job. 

Lien waivers

Construction lenders will often require contractors to sign lien waivers each month; every time they get paid. While there are 4 different types of lien waivers, they basically ensure that the GC or hiring party is paying their subcontractors and suppliers. Lenders want to protect their investment, and do not want a lien to tarnish the project. Contractors should use the form the lender supplies or a form tailored to your state. Follow any additional bank requirements and laws regarding notarizing, etc. 

If you are a sub, sign the lien waivers and return them to the GC as soon as possible. Often the next draw can’t be turned in until all the waivers from the last one are gathered. One sub can hold up everyone else’s payment, and you don’t want to be that person.

After the Project

All parties on a project should keep a record of important documents and dates on the project, even after it’s finished. This practice will help protect your right to file a mechanics lien, in the event that you weren’t paid what you were owed. In most states, the deadline to file a lien is calculated from the “date of last furnishing,” or the last day you were on the job. But in some cases, the deadline can be shortened once the GC or prime contractor files a Notice of Completion.

Notice of Completion

The GC or prime contractor will generally need to file a Notice of Completion once the project is finished. Even in states where this is not required by law, the lender may require it. This is a formal notice that construction is complete. The Notice of Completion is filed in the county recorder’s office as a public record. 

Mechanics Lien (if necessary)

If a contractor or supplier isn’t paid, they generally have the right to file a mechanics lien. Before filing a lien, it’s a good idea to talk to the parties at the top of the payment chain. The lender may not be aware that you haven’t been paid; they can put pressure on the GC to resolve any payment problems. 

If talking to the lender doesn’t help, filing a lien may be the best course of action. Some states require that you file a Notice of Intent to Lien (NOI) before filing the lien itself. Even on its own, an NOI can be a very effective tool to get paid. 

Managing cash flow when a lender’s involved

Because of the layers of approval and the document requirements, getting paid on a financed project can take longer than on other projects. This is especially true when it comes to the first draw on the project. GCs may want to submit this draw early, so if it drags out a bit it won’t be so noticeable. 

If the GC can’t submit early, you may want to get a backup plan in place so you can pay everyone in a timely manner. Contractors often use business savings or a credit line, credit cards, or a short-term loan to make up for a short-term gap in payment.

Remember, construction lenders aren’t the enemy. After all, everyone on a project shares the same goal: To finish the job successfully, and to get paid what they deserve.