Under-capitalization refers to any situation where a business cannot acquire the funds they need. An under-capitalized 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-exposed to risk, or may be one that is financially sound but does not have the funds required to expand to meet market demand. Causes of under-capitalization Under-capitalization is often a result of improper financial planning. However, a viable business may have difficulty raising sufficient capital during an economic downturn or in a country that imposes artificial constraints on capital investment. There are several different causes of undercapitalization, including: Financing growth with short-term capital, rather than permanent capital Failing to secure an adequate bank loan at a critical time Failing to obtain insurance against predictable business risks Adverse macroeconomic conditions Accountants can structure the financials in order to minimize profit, and thus taxes. As a business grows, this approach becomes counterproductive (Van Horn 2006). Frequently, a growing business will apply for a bank loan only to find their entire accounting system under review. Capital sources A manual on collecting capital, by CPA David Levinson, states that one solid approach to assuring capital is to establish a line of credit, borrow against it, even if it isn’t needed, then pay back this loan. Doing this repeatedly can help a business owner expand their capital when they need to increase their credit or take out a larger loan (Levinson 1998). A business may acquire capital through re-investment of earnings, through assuming debt or through selling equity. According to Van Horn, The least expensive ways to raise capital are to finance from cash flow, and to improve cash flow through regular invoicing, collecting overdue receivables, stretching payables without incurring interest or penalties, renegotiating loans for lower interest rates and exploiting trade discounts. Debt is more expensive. The cost of debt is lowest with secured, long-term loans or use of personal savings, higher with unsecured loans, credit card loans and cash advances, and with factoring accounts receivable. Equity financing is most expensive, and dilutes the value of existing owners' shares in the business. It may be the only option if a business has good prospects but insufficient assets to secure loans. Equity capital may be raised through additional investments from existing partners or stockholders, private placement capital, venture capital, taking on a partner