Question

Gerald 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 Gerald to operate the business normally. Which of the following causes of small-business failure does this scenario best?

a. Debt factoring
b. Debt financing
c. Trade credit
d. Economies of scale

Answer 1

Answer: Undercapitalization

Step-by-step explanation:

The cause of small-business failure that is described here is undercapitalization.

Undercapitalization is a term that is used to describe a situation whereby an organization or company has insufficient funding which are required for operational activities. Lack of enough capital by a company can hinder the growth of such company.

This can be seen in the question as we are told that this lead to the difficulty for Gerald to operate the business normally.