What the Heck is Gap Financing?
By Joe Becker, Director of Business Finance
Fond du Lac County Economic Development Corporation
Revolving loan funds (RLF) are normally designed to provide gap financing to help create employment opportunities, encourage private investment, and provide a financing alternative for new business start-ups or expanding existing businesses.
What does someone mean when they say that they provide gap financing? Basically, gap financing is the difference between what a business may need for a project, and the combined amount that they have available through equity and from their lender.
Gap financing does just what it says, filling the gap needed to make the project a reality. It is also referred to as but/for financing, the project would not be viable without this component being a part of the financing package.
Gap financing does just what it says, filling the gap needed to make the project a reality.
Here is a basic example:
A business needs $250,000 for a piece of new equipment. The owner has $60,000 of equity available, and their lending source will loan them 60% of the price of the equipment or $150,000. This leaves a gap of $40,000 that the business needs to come up with to purchase the equipment.
The role of a revolving loan fund (RLF) is to fund this gap, as long as there will be sufficient job creation and the project makes sense from a business standpoint. The RLF will work with the lender and business to work out financial terms that give the business and/or project the best chance of success.
As payments come in on RLF loans, these funds are used to generate future loans under the program.
