New Financial Tools for Small Businesses: A Commitment Mechanism to Secure Funding

Abstract

We suggest new tools for financing small business newcomers that struggle to overcome bank's unwillingness to finance their operations and clients fear that suppliers may choose willful litigation by breaching the contract. We suggest a commitment mechanism based on a commitment to a bank that makes the newcomer supplier’s obligations reliable. We show how the purchase contracts and obligations to banks can be priced, and how the commitment mechanism may provide the banks new tools to spread the risk of newcomers' bankruptcy by selling the obligations as binary options in an options market or by securitization of the purchase contracts.