Not only does he greet us every time we pull out a C-note, but Benjamin Franklin is also credited with the famous adage, ‘time is money.’ Old Ben was onto something. Time is, after all, one of our most valuable resources. When it comes to profitability, it often helps to do things as best and fast as possible. Construction loan administration is no exception.
More secure and faster draw request-to-disbursement times equate to more profitable construction loans. For example, improving draw processing efficiencies on a portfolio of loans through automation leads to a 65% reduction in administrative time, a 4% reduction in points of risk caught in advance, and a 10% increase in incremental interest earnings.
Moreover, faster draw processing times lead to expedited payments to borrowers and better customer experience. Also, incorporating performance enhancements that accelerate the draw process is an easy way to lower a bank’s efficiency ratio, calculated by dividing the bank’s non-interest expenses by their net income.
In our quest to continuously understand the needs of our customers, we surveyed 117 commercial lending executives and real estate developers throughout the United States. We sent each group a confidential questionnaire and walked away with a better appreciation of the challenges and opportunities around construction loan administration and construction draw processing. We’ve summarized the findings for you. Feel free to download or view the entire infographic (see below).
What keeps you awake at night?
We asked both lenders and borrowers their top concern with construction loan draw processing. Wondering if there were enough funds to complete a project was the top concern for 81% of commercial lending executives. Borrowers were in 100% agreement that paying their subcontractors and contractors on time was the top priority.
How long does it take to process a draw request?
Lenders and borrowers have a significantly different view on the amount of time it takes to process draw requests. On average, lenders reported the entire process takes 5.5 days. Borrowers on the other hand, who want to pay their contractors as quickly as possible, said 9.4 days.
The difference in opinion on days to disburse funds matters to construction borrowers in a competitive environment where there’s a shortage of contractors; to retain the best and brightest, developers are under pressure to pay contractors as quickly as possible. They are also in a position to take their next project to a lender across town with a more efficient process.
Further Reading: SaaS - Trends in Construction Loan Administration
How would you describe your borrowers feeling about your draw process?
When we asked commercial lenders to describe how their borrowers feel about the draw process, 50% of the lenders thought that the process was viewed by their customers as fine. However, when asking borrowers about their perception of the draw process, 83% reported that it was frustrating or slow.
The catch is that faster draw processing requires a give and take partnership between lenders and borrowers. Inconsistent or sloppy draw submissions make it harder for lenders to move quickly. In fact, 69% of commercial loan administrators view their internal construction draw process as cumbersome. Given the volume and diversity of documentation included in monthly draw requests, we’re not surprised by their response.
"The hardest part of the construction draw process is getting the proper documentation from the contractor, subs, etc." - VP, Asset Quality Loan Review (from Contract Simply lender questionnaire Q1, '18)
Which reports are most important to you?
Construction loan software provides real time reporting information about payment status so that you can see who is being paid and when. Visibility into this data helps surface potential issues that may lead to disputes, non-payment, and liens.
When it comes to critical reports necessary when administering a construction loan, 75% of the commercial lenders cited the Lien Release report as the top priority. The lien release report tracks the status of conditional and unconditional liens for every invoice broken out by project over a specified time.
Further Reading: What is a mechanic's lien?
Coming in at a close second was Draw Processing reports at 69%. Draw processing is primarily the process of tracking money. How much has been spent? Paid to whom? When? The draw processing report provides a detailed overview on all aspects relating to draws in a specified time period (approval dates, days to process, dates funds withdrawn, etc.).
Behind draw processing was the Cash Flow Projections report at 56%. Other vital reports include Portfolio Composition report which includes the types of projects, locations, loan & project sizes (50%), Capital Requirements report (50%), and the Loan Yield report (50%).
The two most important reports for borrowers include the Budget to Actual (92%), and Change Order (92%). Borrowers also listed the Schedule to Actual report as important (39%).
Aspects of the construction draw process should be automated
More than any other question asked, both parties felt strongly (100% for lenders and 94% for borrowers) that there was an opportunity to automate aspects of the construction draw process.
So, what’s the solution?
How can we improve the entire construction loan draw process for both lenders and borrowers? How can we automate mundane tasks and enable bank employees to focus on more profitable work?
Well, there’s no silver bullet, but some recent trends, platforms, and technological advances are showing promise.
Up until recently, most banks have focused on digital banking solutions to enhance the retail customer experience. This trend has now evolved into other areas such as internal operations within corporate banking.In their piece ‘How is the CRE Industry Adapting to the Emergence of Fintech Solutions,’ National Real Estate Investor reports that the commercial real estate industry continues to see “rapid-fire” evolution in financial tech solutions.
Banks are evaluating and outsourcing services designed to introduce process changes considerably faster while complimenting and enhancing existing deployments and services. Others are using cloud-based mobile technology to connect stakeholders better, anytime and anywhere. Machine learning is also showing tremendous promise as a vehicle to automate mundane tasks while reducing human error, improving employee experience, reducing turnover, and improving overall performance.
If time is money than construction loan administration is ripe for innovation that leads to faster disbursements. More secure and quicker draw request-to-disbursement times equate to more profitable loans, incremental interest income, a better customer experience, and lower efficiency ratios.
Thanks in part to the evolution of technology, construction loan administration is experiencing dramatic improvements in efficiencies within a secure, collaborative, and transparent environment. Moreover, administration teams can manage a higher volume of construction loans with enhanced management controls, reporting capabilities, reduced risks caused by human error, and a better experience for both employees and customers.
About Contract Simply
Contract Simply is the most user-friendly and efficient construction loan management software in the world. It's a fresh and more efficient way for lenders, builders and subcontractors to collaborate and it cuts days from the construction draw process while ensuring compliance and reducing risks for everyone involved.