What is a 'Funding Gap'

A funding gap is the amount of money needed to fund the ongoing operations or future development of a business or project that is not currently provided by cash, equity or debt. Funding gaps can be covered by investment from venture capital or angel investors, equity sales, or through debt offerings and bank loans.

The term is most often used in the context of early-stage companies during the initial stages of research, product development and marketing.

BREAKING DOWN 'Funding Gap'

The ease with which a very young company receives funding depends on many factors including the viability of the business model, barriers to entry for that particular industry, and overall economic and market conditions. When the stock markets are strong, venture capital investors are much more likely to fund startup companies, and may even become less stringent in their eligibility criteria.

Funding gaps are also more likely at these early stages because a company won't know what its full operating expenses will be until it reaches a more mature stage and when, at first, there aren't likely to be any meaningful revenues coming in.

The Impact of Funding Gaps

Organizations can face funding gaps for a variety of reasons. The shortfall in capital may be a result of expenditures in research and development on initial products. For instance, bringing a prototype to full production or taking an experimental drug through clinical trials and regulatory approvals may incur costs that company cannot immediately cover. When businesses face funding gaps, they may seek additional investors or financial vehicles to secure the capital needed to continue moving forward. The expectation is that once standard operations have resumed, incoming revenue will provide sufficient capital to sustain the business.

Government entities and agencies may face funding gaps if the allotted budget for a fiscal period does not include sufficient money to pay for the regular operations and duties of the agency. If schools face funding gaps, they may be forced to eliminate classes, extracurricular activities, instructors, or administrators in order to continue operating.

When government agencies are confronted with funding gaps, programs and initiatives may be forced to cease operation until sufficient resources can be secured. The closure of national parks during government shutdowns is a typical result such funding gaps. The rollout of new military equipment often depends on defense budgets earmarking resources to pay for their development and procurement. When there are shortfalls in federal resources, programs to create new vehicles and hardware may be canceled or suspended until the funding gap can be closed.

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