Game Theory and Small Business Lending…and How They Intersect

By: Jeff Brannon

I’ve always been fascinated with Game Theory.  Game Theory is the study of mathematical models between intelligent, rational decision makers. From the prisoner’s dilemma to behavioral economics, there-in lies an interesting analysis of the Game Theory and how it pertains to Small Business Lending market as it currently stands.

A fundamental assumption in Game Theory, and in Small Business Lending for that matter, is that participants/borrowers act rationally, when in actuality, people in both sample sets act very irrationally.

Let’s look at the small business lending market. We have products/lenders ranging from banks, which are cost effective, yet slow, to merchant cash advance companies, which are expensive, but quick.

The Game Theory application in this example, goes something like this:

ABC Machining needs money. Do they, A, get very expensive money (that costs more than they make) that can be obtained quickly?   Or, B, try to apply to a bank where the money is cheap, but takes a long time to obtain?    If they choose A, they’ll get funded quickly, but will more than likely lose money because of the cost of capital. If they choose B, they may get funded, but may also end up in the same situation they are in if they are declined or lose the opportunity if the loan process takes too long.

Questions ABC Machining starts to ask themselves:

  • This website says I can get $100k in 3 hours, but does this online portal really understand my business and what I need the money for?
  • The bank is asking for 3 years of everything and says it is going to take 60 days. Do I have time to wait 2 months just to be back in this position again?
  • There seems to be a bunch of alternative type lenders that will listen to me, but they all sell different products and are trying to push theirs on me. How do I know what’s best for me?
The company needs to make a decision as they have a project starting, equipment to buy and payroll to fund. What do they do? Game Theory would suggest that most small business owners would take the expensive cash and “figure it out” from there.

….Enter SLIM Capital. We operate in the middle. We target the middle section of businesses that have good credit/good story, but are not bankable. We are a direct lender and, yes, our process can take a couple days or so as we get to understand the story/use of funds, etc. We have a full suite of services, (Growth Capital, MCA Refis, Equipment Financing, Start-Up Funding and Cash Out Refis on Real Estate)
If you foresee a capital need in the near future, give us a call and let’s get a head start on it.  The more time you have to weight options, the higher the likelihood of identifying the right financial product for your business.