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Having too little capital in relation to the business carried on or intended. If a business has insufficient capital, it is liable to become insolvent too easily in the face of the risks nonnal in its line of activity, such as delays in payment by customers. It is risky to lend or extent credit to an under-capitalized business, and being charged premium rates or refused credit is bad for its profits. For most businesses, under-capitalization is discouraged simply by being unprofitable, but in the case of banks cind other financial institutions there is public regulation of capital adequacy, to prevent the insolvency of one institution from causing a general financial panic.

Reference: Oxford Press Dictonary of Economics, 5th edt.