What is the financing gap?

The financing gap is the difference between the money needed to start or continue operation and currently accessible money. The financing gaps are common for very young companies that may underestimate the amount of capital needed to maintain production until a feasible cash flow is determined. The most common solution is a bank loan, but angel investors or capital sale can also help bridge the gap. When the economy is strong, investors are milder regarding the financing of businesses and can even release their standards. However, if the economy is weak, many new businesses have difficulty finding the necessary capital. They can modify their business plan to reflect the minimum amount of the necessary funding, so success looked more frequent to potential investors. The financing gap occurs when reality does not correspond to the assumption.

For example, if Bob wants to establish a company that produces tires, he writes a business plan and is looking for investors. EconomyIt is weak and there are many competitions on the tire market, so well -known manufacturers, so investors will not be reluctant. Bob reconfigures its business plan to reflect the need for less initial funding for more efficient production and earlier strong demands, thereby ensuring investors.

As soon as the production starts, Bob finds that it is not as effective as it hoped, which is reflected in higher energy costs, higher employees' costs and a slower turnover time. They also find that sales are not detected as quickly as it hoped, which means less money coming and higher storage costs for finished stocks. Soon the company will reach a point where production must turn off completely and workers must be released unless further funding is found.

Angels investors are usually owners of private enterprises who invest smaller amounts of money in local businesses, in Prose of $ 37,000. They are looking for a higher return than they offer traditional investments, so they also offer the new owner of the company tools necessary for success such as advice and contacts. Angels investors increase capital available to a new business on average 57% by offering personal loans or guaranteeing external loans. Although angel investors take the probability of the company's success in deciding to invest, their requirements are not as strict as risk capitalists and, as a result, expect about a third of their investment to lose capital.

The second response to the financing gap is the sale of its own capital, in which the company sells its shares to investors and uses the resulting cash flow to continue or improve operations. This can be complicated for new businesses that may be in MA not to prove their reserves of very low values. The only way the new company should have valuable enough to bridge the gap in the field of financing is if it had a toplessResolute prospects and no competition, in which case other financial routes would go through the first.