The specific definition of net deficit funding depends on its context, with two contexts relevant to a small-business owner or entrepreneur. Essentially, the term refers to financing tricks that allow you to spend more money than you earn. This takes different forms depending on who's doing the spending.
Net Deficit Funding by Businesses
For small businesses, net deficit funding means acquiring debt to make up for an income shortfall. For example, you might take out a line of credit at the end of a a slow month, paying your cash flow responsibilities with borrowed money until your income returns. The borrowed money lets you continue operating despite running a cash-flow deficit.
Benefits of Net Deficit Funding
If you're suffering a momentary reduction in income or increase in costs, net deficit funding can help you keep your business running despite the temporary hardship. Without this funding, you might be forced to close operations as vendors demand payment or your landlord evicts you due to nonpayment of rent. Although the interest on the debt makes all costs more expensive, it can make the difference between success and failure for your business.
Risks of Net Deficit Funding
If you are suffering from a permanent downturn, net deficit funding only makes a bad situation worse. This is because the interest payments on that debt will increase your monthly expenses. Unless you can increase revenue to correspond with the added costs, you'll end up in the same deficit in subsequent months.
Net Deficit Funding by Government
Reduced tax rates can potentially increase tax revenue by increasing the productivity of a country's economy through increased cash flow. Because of this, a government might spend money on stimulus initiatives that exceed their current estimated tax income -- relying on the increased tax revenue to make up the shortfall. This applies to small businesses because employers and businesses often get the bulk of the benefit of these stimuli and reduced taxes.
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