Gap financing, as its name suggests, is a kind of loan which is granted for the purpose of fulfilling a financial obligation in the meantime, while the borrower is in the process of securing sufficient funds to make a full payment or find a more stable financing scheme. This is why it is also often referred to as a bridge loan or interim financing.
Since the main objective of gap financing is to provide funds for the fulfilment of an immediate payment obligation, it is by nature a short-term loan. Usually, it is payable in a year’s time, at most. Since this arrangement adds to the lender’s risk, such a financing scheme also comes with a high interest rate. In order for such a loan to be approved, it may be necessary to put up one’s property as collateral. While the conditions may initially seem prohibitive, it may still be a good idea for a borrower to avail of such a financing scheme. This is especially true if the need for immediate cash flow is urgent, or if there is a very good chance that a more advantageous loan arrangement can be arranged in the near future.
Individuals often avail of such loans in order to make mortgage payments. However, companies may also make use of such a financing scheme, especially in cases when an inflow of cash is expected within a given period of time. This allows the business to operate as necessary while waiting for the funding to come through.
Reviewed by Ryan Hammill