Hard capital rationing is brought about by external factors.

Reasons:

1. Raising money through the stock market may not be possible if share prices are depressed.

2. There may be restrictions on bank lending due to government control.

3. Lending institutions may consider an organisation to be too risky to be granted further loan facilities.

4. The costs associated with making small issues of capital may be too great.

Soft capital rationing is brought about by internal factors and decisions by management.

Reasons:

1. Reluctant to issue share capital because:

a) Dilution of control

b) Dilution of EPS

2. Do not want to raise debt capital because management do not wish to commit to a large amount of fixed interest payment

3. Management may wish to limit investment to a level that can be financed solely from retained earnings.