Interim financing is a short-term loan that can become a permanent financing source for your business. This loan is typically made during the production or construction of a project or building. The interim financing loan is replaced with a much larger, long-term type of financing.
Interim financing is most commonly utilized in commercial real estate transactions. On average these loans typically are around 3 years, but some can be as short as 6 months, and others as long as 5-year terms. You have some flexibility with the term to choose an option that works best for you.
Interest rates for interim financing most often float over a defined loan index for the term of the loan and adjust or reset at maturity. In some instances, the rate can be fixed which is important for budgeting purposes. Since the lender is depending on these loans being taken over with a larger loan, they are often interest-only loans. This helps keep the costs down quite a bit for the business as they wait for their construction project to be completed. These loans also do not amortize over the loan term.
There are prepayment penalties on this sort of financing; however, some programs will waive fees if the business converts it into permanent financing with the same lender. This typically occurs.
Interim financing can give you a stronger negotiating position and you can purchase a property without a contingency on the sale of your existing property.