what is undercapitalization 
undercapitalization occurs 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 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 investors want to proceed with caution if a company is undercapitalized because the chance of bankruptcy increases when a company loses the ability to service its debts 