What is an Investment Draw Schedules
When you seek equity investment into a new business or real estate project, the investors will typically invest money based on a draw schedule. This allows the investor to work within your budget and draw schedule to transfer funds from their account into yours through the duration of the project The purpose of the draw schedule is to protect the investor, minimize risk plus exposure to capital lent and to ensure the business gets the agreed upon investment as the work is completed at different stages during the project. Investors never give you all the investment money up front, instead they use a draw method they can monitor objectives and ensure their money is utilized properly. If they need to exit the venture for any reason, their exposure is for only the funds allocated to date and not the entire amount. The draw also allows the investor to hold the borrower accountable to an agreed scheduled Use of Funds.
Typically, a draw schedule is agreed upon by both parties up front, put into a written document with schedule dates to meet specific phases and objectives. So when you complete your agreed upon milestones (goals) you will receive the payment for the agreed upon materials, labor and objectives.
For example: A new start up company gets $150,000 from an investor who sets up a Three (3) Phase draw schedule to release capital as the business needs the funds. PHase I is the start up costs Phase II Is Prelaunch expenses and Phase III is for launch.
- Phase I. $30,000 for Start Up expenses including legal, materials, equipment, fixtures, and facilities to perform the work. This is the 1st Draw from the $150,000 investment to start the business and position to complete first round of offering. The Use of Funds is $15,000 for Start up expenses such as deposits on rent, utilities, phones, insurance, legal, corporate creation and other startup expenses only. Plus $15,000 toward the any creation necessary for the offering, from coding software, raw materials to produce items or other services to prepare the new business for prelaunch. sales The material was purchased with the 1st Draw and has to be completed prior to receipt of 2nd Draw.
- According to the draw schedule, upon completion of Phase I, the investor will provide the funds for the next phase for prelaunch sales and marketing, and replacement inventory.
- Phase 2. $60,000 will allocate $50,000 towards marketing to build a website, social media pages and start social media ads to start creating a demand. $2500 to purchase and build the initial customer contact list, and $7,500 towards more products. Once completed you move into the final phase for the new business, start operating.
- Phase 3. $60,000 is allocated to launch and open the new business for customers. $30,000 goes into the selling efforts, $20,000 into advertising and $10,000 into replacement inventory. Now is when the company has to push hard and get sales. From the profits, the investor begins to get paid back.
At anytime during the Draw Scheduled if the objectives are not met, an investor can charge penalties, in act clauses in the contract and other legal defense measures to protect their investment. If the business shows a severe inability to meet the draw or is heading toward default, the investor can trigger stock share acquisitions often designed to give them majority control over the project of business. Then they can fire the business owners and take complete control. Or they can simply cut off the draw and enter into collections to gain repayment of their investment. Savvy investors will make a new business owner put up their personal assets like a home, savings accounts, IRAs, etc as collateral and in default will use the courts to seize your personal assets. Be aware when working with investors to protect your personal life in the initial agreements.