Thin capitalization

A business is said to have thin capitalization when it has much more debt than equity in its capital structure. This situation is usually considered to be untenable over the long term, since the organization may encounter a period in which its cash flows cannot support the debt servicing payments associated with its debt. As long as this is not the case, thin capitalization can generate unusually high returns for investors, since only a small equity investment is being used to support earned income. Creditors and lenders are unlikely to extend credit to a firm with thin capitalization, unless they can obtain collateral or personal guarantees to protect them in the event of default. A thin level of capitalization is prohibited for banks and insurers in many countries, since their failure would cause great difficulties for depositors and policy holders, respectively.

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Corporate Finance 
Treasurer's Guidebook