'Interim Financing' is explained in detail and with examples in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Interim financing is a way of obtaining funding on a short term basis for a project. It can also be called gap financing or bridge financing. People or companies elects for this kind of financing for a specific purpose.
They may be seeking to get funding so that a project can be finished and start creating revenues. This would keep them from having to take resources away from other projects. This concept generally refers to loans. There are also cases of interim financing where companies utilize grants or other types of financial assistance.
A short term loan proves to be among the most frequently employed types of interim financing. These kinds of loans can be crafted so that the borrower will pay back the entire principle of the loan along with all of its interest in twelve months or less from the loan issue date.
This is the opposite of long term financing. In the longer term variety, the borrower receives several years to repay the loan. Loan deals on gap financing often come with interest rates that are a little higher than with longer term loans. For individuals or companies with excellent credit, financing companies can often offer extremely competitive interest rates on these short term loans.
A common use of interim financing is with construction projects that need to be finished. On an individual level, a consumer may wish to renovate either a room in the house or the entire home. The borrower may decide to obtain a short term loan at a better interest rate to cover the costs of labor and materials at the beginning of the project. This can save the borrower on the more substantial interest rates and fees for using credit cards or store credit with the various vendors. The end result is that the consumer spends significantly less money on the improvement project than he or she would by not utilizing the interim financing.
Real estate deals are another common use for this interim financing. A home owner may wish to move forward and buy a new house. The owner may need their present house to sell first. Short term loans like these can prove to be an optimal answer to the problem. Using the bridge loan the owner buys the house. The borrower can then repay the loan once their original house sells. This kind of strategy will help to push through the sale of the original house as well. The previous owners have already moved, which means the new owners can occupy the property without delay.
The goal of interim financing is to offer a short term bridge loan for the individual or business concerned. Despite this, sometimes a situation develops where the borrower will not be able to repay the loan as quickly as hoped. In this case, longer term or additional financing becomes necessary. Many lenders will work with the borrower in such a case to come up with a longer term financing program.
This will completely pay off the short term original loan. Additional money will usually be provided so that the borrower has the funds necessary to complete the project. This is especially the case with construction companies. It works out better for the borrower to engage in a rollover longer term loan than to take out another short term loan. The reason for this is that the longer term loans’ finance rates are nearly always lower than the most competitive rates lenders will offer borrowers for short term bridge loans.