Capital Rationing

INTRODUCTION

Capital Rationing is a situation where a company has insufficient capital to complete all projects which it would like to undertake (e.g. those with a positive NPV).

Broadly, Capital Rationing can be described as:

• Soft Capital Rationing – due to factors internal to the organisation. For example, projects are limited to funds available from retentions; management are unwilling to commit to additional debt due to the risk involved; the capacity of management to undertake many projects etc.
• Hard Capital Rationing – due to factors external to the organisation. For example, restrictions imposed on further borrowing due to a credit squeeze or lenders unwilling to provide further funds due to risk factors; stock market depressed and share issue not acceptable etc.

POSSIBLE WAYS OF SOLVING CAPITAL RATIONING

• Defer one or more projects to a later period when capital is not rationed
• Share project(s) with another partner
• Outsource part of a project (e.g. component)
• Consider licensing/franchising

Seek alternative sources of funding (e.g. venture capital, sale & leaseback)