Why Your Bank Won't Finance Modular Factory Deposits

You've done everything right. You've secured the land. You've got your entitlements. Your construction lender is ready to fund. And you've found a factory that can deliver your modular project faster and cheaper than stick-built.

There's just one problem: the factory needs a deposit — and your bank won't touch it.

If you've ever tried to get a construction lender to fund modular factory deposits, you already know how this conversation ends. The answer is always no. And it's not because your deal is bad or your lender doesn't like modular. It's because the entire structure of construction lending makes it impossible for banks to fund these deposits — even when they want to.

Here's why.

The Fundamental Problem: Banks Fund Based on "Installed Value"

Construction lenders operate on a simple principle: they fund work that has been completed at the project site. When a foundation is poured, they send an inspector, verify the work, and release funds. When framing goes up, same thing. Every draw is tied to physical progress you can see and touch on the land they have a lien on.

This system works perfectly for traditional construction. But modular breaks it completely.

When you build modular, 60-70% of your construction happens off-site, in a factory that might be hundreds of miles away. The factory needs payment months before anything shows up at your project. But from your lender's perspective, there's nothing to fund — because there's nothing on the site yet.

This isn't a policy your loan officer can override. It's built into how construction loans work at a fundamental level.

The Typical Factory Payment Schedule

To understand the gap, look at what factories typically require:

•         5% at Design Assist — Due 6-9 months before production begins, when you lock in factory capacity and begin design coordination

•         20% at Procurement — Due 60-90 days before production begins, when the factory orders materials for your specific project

•         Up to 50% at Production Start — Due ~14 days before production begins, when modules enter the manufacturing line (exact percentage varies by project size)

Add it up: up to 75% of the module cost can be due before a single unit arrives at your site.

Your construction lender won't fund any of it. The remaining balance is due at delivery — which is finally when your lender will start releasing funds.

This is the modular financing gap. And it exists on every single modular project, regardless of how strong your deal is.

Four Structural Reasons Banks Can't Fund Factory Deposits

It's not just about policy. There are real structural reasons why traditional lenders can't make this work:

1. The Collateral Is in the Wrong Place

Your construction loan is secured by the land and improvements at your project site. Modules sitting in a factory 500 miles away aren't "improvements" — they're inventory at someone else's facility. Banks have no practical way to perfect a security interest in assets at a third-party manufacturing plant.

2. Inspection Doesn't Work the Same Way

Construction lenders verify progress by sending inspectors to the job site. They have established processes, approved inspector networks, and standardized reporting. Factory production requires a completely different approach — auditing manufacturing processes, verifying material procurement, tracking production milestones. Most lenders simply don't have this capability.

3. Appraisal Standards Don't Accommodate Off-Site Work

Standard construction draw schedules and appraisal methodologies are designed around on-site work. There's no line item for "modules in production at factory." Appraisers assess value based on what's physically present and installed. Until those modules are set, they don't count.

4. Regulatory Frameworks Assume Traditional Construction

Bank regulators and internal credit policies are built around conventional construction lending. Risk models, reserve requirements, and loan covenants all assume a traditional site-built project. Modular doesn't fit the template, and most banks aren't willing to create exceptions.

The Real Cost of This Gap

For developers, the financing gap creates an impossible choice:

•         Option A: Fund the deposits yourself, tying up capital that should be working on other projects

•         Option B: Abandon modular and build stick-built instead, giving up the speed and cost advantages

•         Option C: Walk away from the deal entirely

None of these are good outcomes. And this is exactly why modular adoption has been slower than it should be, despite the technology's clear advantages in speed, quality, and cost predictability.

The National Renewable Energy Laboratory found that modular developers need 30% more equity upfront compared to traditional projects — specifically because of factory deposit requirements. The Center for American Progress confirmed that "the payment schedule for modular building requires large upfront capital" and that "lenders often regard modular construction as high-risk" because materials "only become real property once delivered and assembled on-site."

This isn't a niche problem. It's the single biggest barrier to scaling modular construction in America.

What's the Alternative?

If traditional lenders can't fund factory deposits — and they can't — then the capital has to come from somewhere else.

That's where specialty lenders come in. A handful of firms now focus specifically on this gap, providing bridge financing that covers factory deposits and gets repaid when the construction loan kicks in. The best solutions are secured by the land, backed by factory performance bonds, and structured to automatically pay off when modules are set.

This isn't about competing with your construction lender. It's about filling the hole they structurally can't fill — so you can build modular with a capital stack that makes sense.

The Bottom Line

Your bank isn't saying no to your modular deal because it's a bad deal. They're saying no because the fundamental mechanics of construction lending don't work for off-site production. The collateral is in the wrong place, the inspection process doesn't apply, and the regulatory framework assumes you're building on-site.

Understanding this isn't just academic — it changes how you structure your next modular project. Stop trying to fit a square peg into a round hole. Instead, build your capital stack with the right tool for each job: equity, deposit bridge financing, and construction debt, each doing what it does best.

If you're working on a modular project and facing the deposit gap, we'd welcome a conversation. ModCap provides deposit bridge financing specifically designed for this problem — secured by land, backed by factory bonds, and repaid from your construction loan.

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