Undercapitalization is a situation where a business does not have the capital they need to conduct their operations. This occurs when the company is not generating enough cash or is not able to find external financing such as debt or equity.
Additional meaning of Undercapitalization:
An under-capitalized business may go bankrupt as it cannot service its debts. A firm may be under-capitalized even if it is financially sound, if it does not have the funds to expand in order to meet market demand.