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Gap financing
Also called gap funding, bridge piece, mezzanine gap.
Short-term capital that covers the difference between what a primary lender will fund and what a deal actually costs, repaid when the permanent financing or the expected inflow lands.
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What it means
Every deal has a shortfall somewhere: an SBA lender funds most of an acquisition but not the working capital, a construction draw arrives a month after the subcontractor invoices, an equipment order needs a deposit before the lease funds. Gap financing plugs that hole on the understanding that a known source will repay it.
The defining feature is the takeout — a specific, identifiable event that retires the gap money. No credible takeout and it is not gap financing, it is just expensive short-term debt with a story attached.
How it is priced and structured
Because it sits behind the primary lender and depends on somebody else's timetable, gap money is priced for risk and speed rather than for duration. It typically carries a short stated term, a personal guaranty, and either a junior lien or no lien at all — and if a junior lien is involved, the senior lender's consent is usually required, not optional.
Where it shows up in small business
- Bridging to an SBA closing that has slipped
- Funding a deposit or progress payment ahead of an equipment lease
- Covering payroll between a contract award and the first receivable
- Filling an equity injection shortfall in an acquisition, which most SBA lenders will scrutinise closely because borrowed equity is not equity
Where this one catches people
The takeout slipping is the normal case, not the exception. Gap paper is written short because the lender expects to be repaid on a date, and when that date moves the extension is repriced — often with a fee at each extension. A second trap: taking gap money that creates a junior lien can itself breach the senior lender's negative-pledge covenant and blow up the very closing the gap money was meant to reach.
Where you will meet this term
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Gap financing — common questions
What does gap financing mean?
Short-term capital that covers the difference between what a primary lender will fund and what a deal actually costs, repaid when the permanent financing or the expected inflow lands.
Where does gap financing catch people out?
The takeout slipping is the normal case, not the exception. Gap paper is written short because the lender expects to be repaid on a date, and when that date moves the extension is repriced — often with a fee at each extension. A second trap: taking gap money that creates a junior lien can itself breach the senior lender's negative-pledge covenant and blow up the very closing the gap money was meant to reach.
Is gap financing the same as an interest rate?
Gap financing is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does gap financing apply to?
Working Capital, Term Loan, SBA Loan.
Is there a worked example of gap financing?
Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.
What else should I read alongside gap financing?
Bridge loan, Equity injection, Intercreditor agreement, Interim financing, Junior lien.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.