What is a draw request?
A draw request is a borrower's request for funds from a capital provider. In many debt capital deals, borrowers receive funds over the course of a year or two, rather than as a lump sum. A draw request is how borrowers access a portion of the loan that they've already negotiated—provided that they're in compliance with the conditions of their credit agreement when they make their request.
The draw request is a critical part of many debt raises, especially debt raises that are backed by assets. When borrowers submit draw requests, they tend to calculate their requested draw amount by starting with a target advance rate, a period of coverage (e.g., one week) for their funds, or both. The period of coverage is especially important because credit agreements usually outline a maximum draw frequency (e.g., weekly).
Draw requests are most common in construction, as construction projects tend to be milestone-based and require borrowers to verify the achievement of a project milestone in order to unlock additional funding. A construction loan draw request might include verification documents like invoices or receipts for building materials, work inspections, and subcontractor agreements.
However, fintech and proptech companies that raise debt capital will need to execute draw requests as well. Here, we'll focus on how the draw request process works for asset-backed debt raises, rather than construction, though the high-level draw process is similar for all draw requests.
How do draw requests work?
There are three key steps to a draw request: (1) draw request preparation and submission, (2) draw request approval, and (3) fund disbursement. Credit agreements between borrowers and capital providers serve as the source of truth when it comes to the format, conditions, and process of each draw request, but the first few draw requests from a borrower to a capital provider can help both sides identify data access or logistical issues that a credit agreement may not have anticipated.
Draw request preparation and submission. During the draw request preparation process, borrowers need to assemble and sign documents that state a draw request amount and certify compliance with all draw request conditions. In addition, borrowers may need to submit loan tapes or similar files showing that their borrowing base and draw request amount are internally consistent. After assembling this package of materials, borrowers can submit it to their capital provider.
Draw request approval. After a borrower has submitted a draw request to a capital provider, the capital provider will review the draw materials and make sure they're accurate. It's not uncommon for capital providers to request additional information or points of clarification around specific documents, so the draw request approval process might require a few rounds of email back-and-forth.
Fund disbursement. In the final step of the draw request process, the capital provider disburses the requested funds to a borrower. Because this transfer may take several days to clear, borrowers should submit draw requests in anticipation of future capital needs, baking in time for the remediation of any possible issues with a draw request submission package.
What are conditions precedent?
In the context of draw requests, a condition precedent is a stipulation that must be met in order for a lender to approve a borrower's draw request. An example of a condition precedent might be that a borrower has not breached a financial covenant or experienced an event of default in the past 30 days.
Because credit agreements can contain a number of conditions precedent related to a draw request, one constant risk for borrowers is that they submit a draw request to their capital providers that is delayed or rejected because they have not met all the draw request conditions of their credit agreement. When that happens, businesses can face severe funding or operational risks.
By using software to track conditions precedent and automate draw request submissions, borrowers can ensure capital access and mitigate the risk of funding delays.
Where can I learn more?
Streamlining draw requests is a key part of making sure you're getting the most out of your credit facility. If you're still processing draw requests manually, it can be easy to fall short of your compliance obligations and/or plan your draw requests in a way that leads to undercapitalization. Leveraging software designed to automate draw requests can help ensure your company always has access to the funding it needs. If you're interested in learning more about software that can help you scale your capital markets function, just request a demo of Finley here.