Interim financing
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Interim financing, also called gap financing or bridge loan, is the process of obtaining temporary term financing to close a transaction. Usually, it is a short-term loan arranged to cover a company's cash needs until a long-term loan is finalized[1].
Interim financing is intended to support the transaction, until to arranging permanent financing [2].
Bridge loans can be obtained by individuals, or corporations, and they can be structured of different ways. Fundamentally, interim financial is way to fill time gap, when the capital is needed to accomplish a current and a future objective. It is a way to fill the financial space between point A and B where funds may be insufficient[3].
Interim financing in business
The companies can get funding to finished a current project and start creating revenues. This allows them not to take funds from other projects. There are cases of interim financing where companies uses grants or other types of financial assistance, but generally this concept refers to loans. The companies can get funding to finished a current project and start creating revenues. This allows them not to take funds from other projects. There are cases of interim financing where companies uses grants or other types of financial assistance, but generally this concept refers to loans. The most frequently type of interim financing is a short term loan. These loans can be prepared so that the borrower will pay back the entire of the loan with all of its interest in one year or less from the loan issue date. This is the opposite of long term financing[4].
Interim financing in Real Estate
The buyer may turn to interim financial as a bridge loan, if he has a delay between the purchase of one property and sale another property. Then, lenders offer real estate bridge loans with very good credit ratings and low debt-to-income ratios. Bridge loans include the mortgages of both property together and giving the buyer time flexibility until the first real estate is sold. But usually, the lenders offer interim financial only when the worth of the combined value of the two properties is 80%, it is meaning that the borrower must have significant home equity in the original property or ample cash savings[5]. In the case of real estate investments, the developer, at the end of the original construction loan period, may wish to get interim financing rather than permanent financing, because maybe interest rates will fall in the future, or the investment plans have changed.
Advantages and disadvantages of Interim financing
The main advantages of interim financing are:
- Interim financing may help prevent losing of chance to purchase or sale of property
- In contrast to traditional loans, a bridge loans have a faster application, approval and funding process
- Most of the interim financing does not provide repayment penalties.
The most important disadvantages of interim financing are:
- relatively short terms
- high interest rates
- large origination fees.
Examples of Interim financing
- Short-term Loan: This type of loan is usually taken out to cover the gap between when a transaction is agreed upon and when the long-term loan is finalized. It can be used to cover expenses such as payroll, inventory, and other costs.
- Asset-Backed Line of Credit: This type of loan is taken out against a company's assets, such as inventory, accounts receivable, and machinery. This loan gives the company access to funds and can be used to cover short-term needs.
- Capital Investment: Interim financing can also be used to cover a business's capital investments. This could include building a new facility, purchasing new equipment, or expanding a business.
- Invoice Financing: Invoice financing is a type of interim financing that is taken out against an invoice. This type of financing allows a business to access money without waiting for payment from a customer.
Interim financing, also called gap financing or bridge loan, is the process of obtaining temporary term financing to close a transaction. There are other approaches related to Interim financing, such as:
- Factoring, which is the process of selling accounts receivables to a third-party in order to get immediate cash;
- Asset-based lending, which is using the company’s assets as security to get a loan;
- Merchant cash advances, which is obtaining a lump sum of cash in exchange for a percentage of future sales;
- Equity financing, which is raising funds by selling a stake in the company;
- Government loans, which are loans provided by the government for specific purposes;
- Venture capital, which is money provided by investors in exchange for a stake in the company.
In conclusion, Interim financing is a short-term loan arranged to cover a companys cash needs until a long-term loan is finalized. Other approaches related to it include factoring, asset-based lending, merchant cash advances, equity financing, government loans, and venture capital.
Footnotes
References
- Evans D., Evans O.W. (2007), The Complete Real Estate Encyclopedia: From AAA Tenant to Zoning Variancess and Everything in Between, McGraw-Hill
- Leary P. (2016), The Loan Officer’s Little Black Book, P.S. Publishing
- McBryde M., Stein P. (2005), External Revolving Loan Funds: Expanding Interim Financing for Land Conservation, Lincoln Institute of Land Policy
- Scott D.L. (2003) Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor, Houghton Mifflin Harcourt, s.193
- Weijs R., Baltjes M. (2018), Opening the Door for the Opportunistic Use of Interim Financing: A Critical Assessment of the EU Draft Directive on Preventive Restructuring Frameworks, Insol International
Author: Weronika Wielochowska
