A funding gap is generally referring to the funds still needed/not yet acquired to develop and complete a project. The “gap” is still needed and not covered with the cash available, the equity, or the debt. More often than not, the term is used during research projects and developments in the early stages of the company or project development. Essentially, these gaps need to be funded through a variety of different debts and venture capitals or angel investor options that exist precisely for these purposes. 

It is more common to see funding gaps in new up-start businesses because the company doesn’t yet know what it’s average operating expenses will be quite yet. Younger companies have a bit of a harder time getting funding, only because it depends so heavily on their visibility to the lender and the general state of the economy and the stock market. They are much more likely to get funding when the stock market is favorable, for example, because venture capital investors will be more likely and willing to fund start-up companies. It also means they’d be a little less strict with their eligibility criteria, making it easier for these start-up companies to get the funding they need.

Examples

Funding gaps exist in situations where there is a product or a company that is going from its earliest stages to its final form. Products going from prototype to fully prepared and ready to attempt passing some approval steps may incur some unexpected costs or general operational costs that the company cannot pay right away. For example, the same goes for an experimental drug, as it needs to pass some clinical trials and regulatory approvals that may incur some high costs and create a funding gap.

At this point, when a company is faced with a funding gap, they often seek to find more investors and financial aid vehicles to secure that sum needed to close the gap. At this point, they need to secure some capital to keep moving forward. The hope is that once the company is ready to perform at regular operation or their drug is ready to hit the markets; the income revenue would be enough to sustain the business and pay back the loans.

Funding gaps are not only a problem for private businesses, however, as government entities can face them as well if the allotted budget they’ve been given for a fiscal period isn’t sufficient to sustain their regular operations and expenses. For example, a school may be forced to cut classes, extracurricular activities, and even staff if faced with a funding gap. This cut would be necessary to continue operations in the face of this funding gap. 

Another example of government entities is when a government shutdown results in the closing of national parks. These closures are often a result of a funding gap and can result in a lack of federally funded resources and activities. However, when it comes to federal funds, the problem is not exclusive to the money itself. A funding gap in government agencies can happen if the agency lacks the authority to allocate its funds properly.