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.
Frequently, a growing business will apply for a bank loan only to find their entire accounting system under review.
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).
However, as decided in Walkovszky v. Carlton, the parent corporation is not responsible for settling claims in excess of remaining assets when an undercapitalized subsidiary fails.
A contrary view comes from the economist Robert Solow, who was awarded the Nobel prize for his work on the ways in which labor, capital and technical progress contribute to overall economic growth.