LYNCHBURG -- A federal bankruptcy judge has authorized interim financing of up to $5.8 million to allow the Craddock-Terry Shoe Corp. to continue its scaled-down operations.

The financing, by the First National Bank of Chicago, is expected to allow the Lynchburg-based shoe maker, which is seeking to reorganize under Chapter 11 of the federal bnkruptcy code, to borrow money that officials say is needed to operate for the next few weeks. Craddock-Terry is expected to ask at a Nov. 25 hearing for approval of a long-term financing arrangement.

Meanwhile, a New Hampshire company reportedly is negotiating to buy one of Craddock-Terry's closed factories and rehire the employes.

The Richmond Times-Dispatch quoted an official of Encore Shoe Co. of Rochester, N.H., as saying that the company is interested in either Craddock-Terry's Chase City plant or its Halifax plant.

Craddock-Terry closed plants in Blackstone, Chase City, Farmville, Gretna and Halifax last month. It had already closed plants in Dillwyn, Lawrenceville, Lynchburg and Victoria.

Encore, a 25-year-old family owned company, manufactures custom-made shoes sold under the brand name Zodiak.

Craddock-Terry wants to keep its Hill Brothers mail-order business and hopes to reorganize its other divisions around it, according to Alan Kolod, an attorney for the company.

Jerry Bostwick, executive vice president of Craddock-Terry, told the bankruptcy court last week that the company has no independent source of financing and would be unable to continue without the interim financing that had been offered by First National Bank of Chicago.

Craddock-Terry, which has closed five plants since last month and put 950 Virginians out of work, filed for reorganization two weeks ago.

Until last year, Craddock-Terry was a publicly traded company. In April 1986 HH Holdings, an investment company owned by California financial adviser Alan Salke and New York apparel maker Sidney Kimmel, bought the shoemaker