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Gap Financing: A Quick Fix To Your Loan Woes

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The term "Gap Financing" is a term associated with mortgage loans or property loans. This is an interim loan given to finance the difference between the floor loan and the maximum permanent loan as committed. This is a type of loan that runs against the distribution rights, that production company has not sold yet, after trading those off the lender is the first creditor to get the money along with the interest and fees.

What Is Gap Financing?

Gap Financing refers to a form of financial loan that covers a gap in time, funding, or negotiations. Also known as "Bridge Loan", this loan is meant to finance the difference between the floor loan and the maximum permanent loan as committed. In other words, gap financing is a short-term loan meant to help people meet an immediate financial obligation until they manage to arrange sufficient funds to finance the longer-term financial need.

As a matter of fact, gap financing carries a higher cost to the borrower. Bank representatives are there to assist the customers who are in dire need of gap financing. These officials guide the customers and discuss how they can manage to provide suitable loans. The basic idea while offering gap financing is that the loan is truly on a short term basis with the low risk of default.

How Does Gap Financing Work?

Gap-financing is a short term loan that is mainly used to provide funds for the fulfillment of an immediate payment obligation. It is a short-term loan that is usually payable in a six-month or a year's period. Gap financing comes with a higher interest rate as this arrangement adds to the lender's risk.

The customers looking for gap financing are required to put up their property as collateral. That is how the entire plan works smoothly. Gap financing proves to be the best for someone who desperately needs cash at present, or if there is a possibility of a better loan arrangement in the near future.

Examples of Gap Financing

Let us better understand the gap financing concept with these examples:

  • Home loan is one of the areas of Gap financing, in home loans the gap financing appears between the total amount of loan and the amount that the bank is willing to pay, in that case, the borrower can take a specialized to make a down payment, in addition to the conventional home loan.
  • Property development can involve gap financing, and property development can be very expensive, the gap between the projected sales price and the development cost, gab financing can help to reach the gap in order to complete the project.

Bridge Loan Definition

A bridge loan is a short-term loan used in both commercial and residential real estate. This type of loan is often used by the people who wish to buy a new house or the ones who are planning to move into a bigger house. Bridge loans help such people to get the money they need to buy a home before they sell their current house. Such loans help ease out the entire process. In other words, it "bridges the gap" between the time the old house is sold and the new property is purchased.

A bridge loan can typically extend up to 12 months. Most of the bridge loans carry an interest rate of roughly 2% above the average fixed-rate product. Moreover, these loans come with equally high closing costs.

How Is The Funding Gap Calculated?

As mentioned earlier, the funding gap can be described as a shortfall in capital needed to fund future projects. The gap may be closed with debt instruments or equity participation. This is often a case with industries that rely on research and development to bring products to market. Some of the best examples of such type of industries include the pharmaceutical or technology industries.

You can calculate the funding gap as follows:

  1. Divide up assets/liabilities into maturity buckets
  2. Within each bucket, figure out the value of rate sensitive assets (RSA) and

rate sensitive liabilities (RSL).

  1. Then the funding gap is simply

FGAP = Value of RSA - Value of RSL

That's enough for someone who only needs a basic idea of consumer behavior. However, the students who are pursuing a higher degree in finance need to have an in-depth knowledge of this concept. A clear idea of concepts would help them score better in exams as well as assignments. But is it as easy as it sounds? Well, not really. There are a number of factors that may keep students away from performing the way they are supposed to. These factors may include exam stress, procrastination, busy academic schedule, unclear concepts, excess of assignment tasks, and so on. A bit of help can sort their lives, and that's exactly what reliable online assignment services like strives to provide.

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