Also known as gap or bridge financing, interim financing is a means of securing short-term funding for a project. The idea behind this type of financing strategy is to provide resources that allow a project to be completed and begin to generate revenue, without having any type of negative impact on other projects. The term is most often applied to loans, but interim financing may also be accomplished with the aid of grants or other means of financial support.
One of the most common of all forms of interim financing is the short-term loan. Loans of this type are normally written in a manner that allows the total amount of the loan, including interest, to be repaid with a twelve-month period from the date of issue. This is in contrast to long-term financing, where the balance of the loan is repaid over a period of several years. It is not unusual for loans of this type to carry a slightly higher rate of interest, although it is possible to secure short-term loans that come with very competitive rates.
Interim financing is often employed when it comes to the completion of construction projects. For example, a short-term loan may be used to finance the remodeling of a room in a home, or even renovate the entire dwelling. The borrower takes out the short-term loan and is able to pay for materials and labor up front, thus avoiding the accumulation of higher fees and interest rates that would apply if credit accounts were established with different vendors. As a result, the final cost for the project is significantly less than it would be without the interim financing.
Another application of interim financing is found with real estate deals. For homeowners who want to purchase a new home, but are waiting for a currently owned property to sell, a short-term loan is often the ideal solution. The loan makes it possible to purchase the new home, then pay off the interim loan once the other property has sold. A strategy of this type can often help expedite the sale of the older property, since the new owners can move in immediately, without allowing time for the previous owner to vacate the premises.
While interim financing is only intended to provide a bridge for a short period of time, there are situations where the necessity of additional financing over a longer period becomes apparent. When this is the case, lenders are often open to the idea of creating a long-term financing solution that pays off the short-term loan, and provides the borrower with the additional resources needed to continue with the project. This process is more favorable than simply taking out a new short-term loan, since the interest rates that will apply to the long-term financing are highly likely to be lower than even the best rates found with short-term loans.