Question

Gerard started a business using the savings from his previous job. He planned to run his business on the revenue generated from sales. However, a few months later, he found it difficult to pay his staff, rent, and other expenses. Seasonal sales and inability to secure sufficient credit from local banks made it difficult for Gerard to operate the business normally. Which of the following causes of small-business failure does this scenario best illustrate?

Answer 1

Answer: Undercapitalization

Explanation: Undercapitalization is a term used when a company experiences insufficient funding to carry out operational activities such as salary payment, equipment procurement, rent and other expenses. When a business does not have access to sufficient funds, it's growth is impeded due to its inability to make investments necessary for growth, expansion and withstand a competitive market. Undercapitalization is usually attributed to small businesses, when small businesses do not have enough capital, the ability to grow, compete and withstand occasion business shortfalls is lessened. And with increasing players coming into the market, the business might not survive.