A Brief History of Loans: Business Lending Through the Ages

Lending has existed for thousands of years but it hasn’t always looked the way
it does today, which leads us to thinking, what does the future of lending really
hold? The history of business loans is key to discovering what lies ahead.

History of Business Loans: When Were Loans Invented?

The very earliest example of lending dates back to over 4,000 years ago in
Mesopotamia, 2,000 BCE, where the very first payday loans were used by
farmers. Whether or not loans existed in a small tribe or unknown civilization
before this is a mystery, but 2,000 BCE is the very first evidence that we have
recorded.

Now, seeing as one farmer’s seed could yield a plant with hundreds of seeds,
farmers began to borrow seeds issued against a later payment. This was used in
a similar manner with animals where the repayment was issued with the birth of
a new calf.

1754 BCE: Mesopotamia – First Interest Rates

Sumerian temples actually went on to function not only as places of worship but
as banks – and this is where the very first large-scale systems of loans and
credit began. As the city grew, so did the complexity of the people’s needs and
lending agreements and so the idea of charging interest was developed. Silver
at this time began gaining popularity, but unlike calves and grain, did not
naturally gain interest.

400 BCE: Ancient Greece – The First Payday loans

One of the oldest lending methods can be found in Ancient Greece where
pawnbrokers lent money by collecting collateral from a borrower and reducing
the risk of the lender. This is something we still use today with when it comes to
secured business loans. If you’re looking for a loan and not wanting to use
collateral, however, you would need to use an unsecured business loan.

1400 AD (Middle Ages) – Lending Outlawed

In this period of time, the largest form of authority came from religion, be it the
Christian bible throughout Europe or the Qur’an in the Middle East. Both
religions banned the practice of lending (or lending with interest outright)
however, the Jews’ Torah permitted lending, though only allowed for interest to
be charged with non-jews.
With Jews being the only people allowed to lend money, they soon gained a
rather nasty reputation which is arguably what lead to their persecution. This
continued into the 18th century and over time, the huge economic benefits of
lending were slowly realized. This led to the dilution of restrictions and the
traditional banking functions that we know and appreciate today.

Fun fact: the term ‘bankrupt’ comes from the Italian and Latin word for a broken
bench (‘banca’ is ‘bench’ in Italian and ‘rupt’ is ‘broken’ in Latin). In Italy, Jews
weren’t allowed to hold land, and so lent money from ‘benches’. When a money
dealer ran out of money, his bench would be broken hence the term ‘broken-
bench’ or ‘bankrupt’.

Whether the bench or table was broken out of rage, or to purely signify that it
was no longer functioning is a mystery.

Mid-18th century: Industrial Revolution – Birth of International Finance

By the 18th century, lenders still used collateral but there was a big shift to
indentured loans. In this practice, the rich lent to the poor and the borrower then
had to work off their debt.

With international trade booming, the banking world had some catching up to
do. Greater controls were needed and Mayer Amschel Rothschild is largely
responsible for pioneering international finance through the establishment of
centralized banks. He cleverly shipped his sons off across the major European
cities of the time (Frankfurt, Naples, Vienna, France, and London) to set up
banks in each city.

The 1800’s went onto usher in a new era of lending to make loans more widely
available to the average Joe (thank goodness!).

1980’s: Online Lending is Born

With hundreds of hours of paperwork involved in filing and handling loans

combined with a rising population and need for loans, computers came to the
rescue just in time. With the evolution of the computer and electronic data, the
ways of lending too evolved.

The Future of Lending

The future of lending is NOW; thank goodness we live in a time where medieval
practices are out the window. Now everyone and anyone can easily compare
loan options online and see which loan products offer the best deal.

Different Types of Business Loans

Bank Term Loans

Bank Lines of Credit
Equipment Loans
Purchase Order Financing
Personal Loans for Startups
Working capital
Lines of Credit
Commercial Real Estate Loans
Letter of Credit
Commercial Vehicle Loan
Start Up Business Loans
 Bank Regulation

Bank regulation is a form of government regulation which subjects banks to

certain requirements, restrictions and guidelines, designed to create market
transparency between banking institutions and the individuals and corporations
with whom they conduct business, among other things. As regulation focusing
on key actors in the financial markets, it forms one of the three components
of financial law, the other two being case law and self-regulating market
practices.

Banking regulations vary widely between jurisdictions.

1. Licensing and supervision

licensing

licensing, sets certain requirements for starting a new bank. Licensing provides
the license holders the right to own and to operate a bank. The licensing
process is specific to the regulatory environment of the country and/or the state
where the bank is located. Licensing involves an evaluation of the entity's intent
and the ability to meet the regulatory guidelines governing the bank's
operations, financial soundness, and managerial actions. The regulator
supervises licensed banks for compliance with the requirements and responds
to breaches of the requirements by obtaining undertakings, giving directions,
imposing penalties or (ultimately) revoking the bank's license.

supervision
supervision, is an extension of the licence-granting process and consists of
supervision of the bank's activities by a government regulatory body (usually
the central bank or another independent governmental agency). Supervision
ensures that the functioning of the bank complies with the regulatory guidelines
and monitors for possible deviations from regulatory standards. Supervisory
activities involve on-site inspection of the bank's records, operations and
processes or evaluation of the reports submitted by the bank. Examples of bank
supervisory bodies include the Reserve Bank of Malawi.

2. Minimum requirements
A national bank regulator imposes requirements on banks in order to promote
the objectives of the regulator. Often, these requirements are closely tied to the
level of risk exposure for a certain sector of the bank. The most important
minimum requirement in banking regulation is maintaining minimum capital
ratios.

a) A capital requirement (also known as regulatory capital or capital

adequacy) is the amount of capital a bank or other financial institution has
to have as required by its financial regulator. This is usually expressed as
a capital adequacy ratio of equity as a percentage of risk-weighted
assets. These requirements are put into place to ensure that these
institutions do not take on excess leverage and become insolvent. Capital
requirements govern the ratio of equity to debt, recorded on the liabilities
and equity side of a firm's balance sheet. They should not be confused
with reserve requirements.
b) Reserve requirements- Govern the assets side of a bank's balance
sheet—in particular, the proportion of its assets it must hold in cash or
highly-liquid assets. Capital is a source of funds not a use of funds

3. Market discipline
The regulator requires banks to publicly disclose financial and other information
and depositors and other creditors are able to use this information to assess the
level of risk and to make investment decisions. As a result of this, the bank is
subject to market discipline and the regulator can also use market pricing
information as an indicator of the bank's financial health.

4. Corporate governance
Corporate governance requirements are intended to encourage the bank to be
well managed, and is an indirect way of achieving other objectives. As many
banks are relatively large, and with many divisions, it is important for
management to maintain a close watch on all operations. Investors and clients
will often hold higher management accountable for missteps, as these
individuals are expected to be aware of all activities of the institution.

5. Financial reporting and disclosure requirements

Among the most important regulations that are placed on banking institutions is
the requirement for disclosure of the bank's finances.