Legal Definitions - gap financing

Gap financing refers to a temporary loan or investment designed to cover a short-term funding shortfall in a project or transaction. It acts as a bridge, providing the necessary capital to "fill the gap" between the total amount of money required and the funds secured through primary, long-term financing or equity. This type of financing is often used to complete a project, facilitate an acquisition, or maintain operations until more substantial, permanent funding becomes available.

• Real Estate Development: Imagine a property developer constructing a new commercial building. They have secured a primary construction loan that covers 85% of the projected costs. However, midway through the project, unexpected increases in material prices and labor costs mean an additional 10% of the original budget is needed to complete the building. A lender provides gap financing to cover this shortfall, allowing the developer to finish construction. This temporary loan enables the project to reach completion and generate revenue, at which point the gap financing can be repaid, often through a refinance with a permanent mortgage or the sale of the completed units.

• Business Acquisition: Consider a growing manufacturing company that is acquiring a smaller competitor to expand its market share. They have secured a substantial bank loan for the majority of the acquisition price, but there's a remaining 7% needed to cover the final closing costs, legal fees, and immediate integration expenses. An investment fund steps in to provide gap financing for this remaining amount. This ensures the acquisition can close on schedule without delays. The gap financing is designed to be repaid within a short period, perhaps once the combined entity optimizes its operations and secures a larger, consolidated debt facility or generates sufficient cash flow.

• Film Production: A independent film studio is producing a new movie. They have secured the majority of their budget, about 90%, from a major distributor based on pre-sales and distribution rights. However, to attract a specific highly sought-after director and secure a key location, an additional 10% of the budget is required. A specialized film finance company provides gap financing to cover this extra cost. This allows the production to move forward with the desired talent and locations, enhancing the film's marketability. The gap loan is typically structured to be repaid from the film's initial box office receipts, streaming revenues, or further distribution deals.