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What Is a Financing Gap?

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  • Written By: Mary McMahon
  • Edited By: Nancy Fann-Im
  • Last Modified Date: 09 December 2016
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In financial terms, a financing gap is a difference between available funds and the money a nation or company needs to operate. It is difficult to raise funds in traditional ways to meet this shortfall, because the available funds include all the money it is possible to access through conventional financing. Addressing gaps of this nature requires innovation and creativity, and in some cases outside support is necessary.

On the level of a national government, a financing gap occurs when a country needs money to pay for imports, service debts, and conduct daily operations, and the money it makes does not meet this need. The country can try raising exports to increase income, but this can result in incurring more debt. Measures like issuing public debt and raising taxes are also options, but they may not be politically feasible and could create economic problems in the future.

Countries facing a financing gap may turn to the international community for aid. In the case of developing countries, it may be possible to get grants or loans on favorable terms from members of the international community with an interest in helping developing nations become more autonomous. These funds will fill the financing gap and allow the country to focus on building its industries so it can become more profitable in the future. Developed nations have less access to these options.

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In the case of a business, financing gaps most commonly occur in small and medium-sized companies during their expansion stages. These companies are growing rapidly, and their administrators want to maintain a steady rate of growth and invest in the future of the company. This can create a financing gap, as the company needs money but is not taking in enough profits to satisfy its needs. Another round of financing through investors like venture capitalists and shareholders may not be an option because the company may have tapped out its resources.

Companies can use a variety of measures to address a financing gap. They may slow their rate of growth to bring income and expenditures into closer alignment. Another option may involve looking for nontraditional financing, seeking fresh investors who may be willing to assist a growing company, or applying for government assistance. Regional and national governments may provide grants to businesses that will contribute to economic growth and development, particularly if they fill an unusual niche.

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