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What Is Gap Financing?

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  • Written By: Mary McMahon
  • Edited By: Nancy Fann-Im
  • Last Modified Date: 01 November 2016
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Gap financing is financial assistance in the form of a loan to cover a gap in time, funding, or negotiations. This loan operates in the short term to meet a very specific need and becomes due quickly. In a simple example of gap financing, a home buyer might need a temporary loan to buy a new home while waiting for his old home to sell. The bank offers this financing on the understanding that the other home sale will cover the loan, as soon as it goes through.

Many financial institutions offer this financial product for a variety of settings. Customers in need of gap financing, or bridge loans, as they are also known, can meet with a representative to discuss the specific need and how they plan to manage the loan. The bank wants evidence that the loan will be truly temporary, with a low risk of default.

One area where gap financing frequently occurs is in the film industry. Making a movie can be tremendously expensive, especially when production runs over for any reason, such as weather that delays shooting. Gap financing is a loan made against the distribution rights that the production company has yet to sell. As soon as it does sell them, the lender is the first creditor and must receive the money, along with interests and fees. Film financing is often a specialty product offered only by financial institutions with experience in this area.

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Home loans can involve gap financing, and some buyers may be eligible for financing to cover the gap between the total amount of a loan and the amount a bank is willing to offer. The borrower can take out a specialized loan to make up the down payment in addition to the conventional home loan. Some regions have special programs to promote home ownership that offer bridge loans to people in qualifying communities, and a mortgage broker can provide advice and assistance.

Property development is another area where this type of financing can be popular. Development can be costly and gap financing, based on the projected sales price of units, can make up the difference and allow the developer to complete the project. Without this money in hand, the developer might end up stalled and unable to finish, which can result in running afoul of earlier creditors waiting for payment as well as losing out on the anticipated profits from the development.

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