Undercapitalization

Undercapitalization
When a company does not have sufficient capital to conduct normal business operations and pay creditors. This can occur when the company is not generating enough cash flow or is unable to access forms of financing such as debt or equity. If a company can't generate capital over time, it increases its chance of going bankrupt as it loses the ability to service its debts. Undercapitalized companies also tend to choose high-cost sources of capital, such as short-term credit, over lower-cost forms such as equity or long-term debt.

Being undercapitalized is a trait most often found in young companies that do not adequately anticipate the start-up costs associated with getting a business up and running. It can also occur in large companies that take on significant amounts of debt and suffer from poor operating conditions.

If undercapitalization is caught early enough, and if the company has sufficient cash flows, it can replenish it coffers by issuing stock or debt, or obtaining a long-term revolving credit arrangement with a lending group. However, if a company is unable to produce net positive cash flow or access any forms of financing, it is likely to go bankrupt.


Investment dictionary. . 2012.

Игры ⚽ Нужно сделать НИР?

Look at other dictionaries:

  • Undercapitalization — refers to any situation where a business cannot acquire the funds they need. An undercapitalized business may be one that cannot afford current operational expenses due to a lack of capital, which can trigger bankruptcy, may be one that is over… …   Wikipedia

  • undercapitalization — A situation in which a company does not have enough cash available to carry on its business. Category: Business, LLCs & Corporations → Business Accounting, Bookkeeping & Finances Category: Business Cash Flow Problems & Bankruptcy Category:… …   Law dictionary

  • undercapitalization — undercapitalized un‧der‧cap‧i‧tal‧ized [ˌʌndəˈkæptl aɪzd ǁ ər ] also undercapitalised adjective FINANCE if a company is undercapitalized, it has less capital than it needs in order to operate effectively and grow: • If you set up a store and you …   Financial and business terms

  • undercapitalization — See undercapitalize. * * * …   Universalium

  • undercapitalization — noun Insufficient capitalization See Also: overcapitalization …   Wiktionary

  • undercapitalization —   sottocapitalizzazione   Quando il capitale aziendale disponibile è insufficiente al mantenimento delle condizioni di equilibrio e sviluppo dell impresa …   Glossario di economia e finanza

  • undercapitalization — The state of a company that does not have sufficient capital or reserves for the size of its operations. For example, this may be due to the company growing too quickly. Although such a company may be making profits it may be unable to convert… …   Accounting dictionary

  • undercapitalization — The state of a company that does not have sufficient capital or reserves for the size of its operations. For example, this may be due to the company growing too quickly. Although such a company may be making profits it may be unable to convert… …   Big dictionary of business and management

  • undercapitalization —    A situation in which a company does not have enough cash available to carry on its business …   Business law dictionary

  • undercapitalization — A term used in reference to a business which does not have enough cash or capital to effectively carry on the business. See also thin capitalization …   Black's law dictionary

Share the article and excerpts

Direct link
… Do a right-click on the link above
and select “Copy Link”