It’s no secret that one of the first things you need to do to get a start-up off the ground is secure financing from investors, a bank, alternative funder, or other business. And while a lot of advice for start ups focuses on how to get that crucial initial funding, there isn’t nearly as much information about a secondary but no less serious issue that many start ups face: bridge funding gaps.
What is a Funding Gap?
As you might be able to guess from the name, a funding gap occurs when a company has secured a longer-term funding agreement that will kick in the near future, but doesn’t have sufficient capital to stay afloat in the interim period.
There are a variety of reasons why start-ups face funding gaps, but here are three of the most common:
- Increased expenditures caused by researching and developing new products, creating prototypes, etc.
- Unforeseen delays in arranging the funding agreement
- Issues with liquidity on the part of the funder
In each of these cases, you may have been able to demonstrate your company’s financial viability convincingly enough to enter into a funding partnership with a financial institution, investor, or stakeholder, but due to circumstances beyond your control were not able to make the funding periods line up seamlessly.
Issues related to funding gaps are especially common for start-ups because of the flux involved in getting a new company — even a very promising one — off the ground. Fortunately, you aren’t at the mercy of your investors: there are things you can do on your own to make ends meet while waiting for your ship to come in.
How Should Start-Ups Navigate Funding Gaps?
Depending on what kind of business you are in, funding gaps can be minor annoyances, or serious setbacks that can damage your company’s viability.
For example, if your company is already providing regular services to customers and clients, interruptions to these services can cause you to lose market share, making it much more difficult for you to honour commitments to your main funding partners.
The best way to navigate funding gaps is simply to secure additional funding through small business loans perfect for start ups that will let you borrow off the forthcoming loan to secure short term funding to carry you through until your main funding package kicks in.
If your long-term funding is already locked in, this gives you significant security to acquire another loan, and plenty of alternative loan companies offer specialized loans designed specifically to help companies maintain operations during funding gaps.
For most start-ups, the first year is an absolutely critical period. As you generate interest, work with your partners, and try to provide the highest quality products and services, making everything line up properly can seem impossible.
If you are worried that your start-up will have to navigate a funding gap in the upcoming year, make sure you understand your options and are prepared to secure the cash you need to keep your company going until your financing package comes through. It could mean the difference between failure and success.