Unsecured front-money loans are working capital advances to a borrower who may be engaged in a new and unproven venture. The borrower may use the funds to acquire or develop a building site, eliminate title impediments, pay architect or standby fees, and/or meet minimum working capital requirements established by other construction lenders. Repayment of an unsecured front-money loan often comes from the first draw against a construction loan. A Bank extending a front-money loan should require the construction loan agreement to permit repayment of the front-money loan on the first advance.
Since front-money lending is inherently risky, a Bank should assure that it has the necessary expertise to evaluate and manage the risk prior to engaging in this type of lending. Banks should avoid unsecured front-money loans used as a developer’s equity investment in a project or for initial cost overruns, since they are symptomatic of an undercapitalized or possibly inexperienced or inept builder.