V4B Business Finance

The history of commercial finance – business loans through the ages

commercial finance

The lending process precedes the invention of money and began thousands of years ago with the dawn of civilisation.

Over the centuries that followed, commercial finance evolved to play a key role in the progress and economic development of civilisation, both in the ancient and modern world.

Here, we present a brief history of business loans through the ages and the key turning points that shaped today’s lending market.

The first loan system

The earliest recorded instance of business lending was 4,000 years ago and can be seen as a forerunner of the payday loan. It was happening in Mesopotamia – the world’s first civilisation.

Life became more complex as the Mesopotamians began to develop networks of urban settlements on the banks of the Tigris and Euphrates rivers in what is today Iraq and Kuwait in the Middle East.

Along with civilisation and the creation of cities came the first examples of architecture, legislation, philosophy, religion, technology, literature and agriculture.

Farmers in Mesopotamia in 2000 BCE began borrowing seeds and sharing the resulting harvest to pay back the lender. A similar lending system was used with livestock, with repayment in the form of a new-born calf.

The Sumerians – a powerful force in Mesopotamia – called interest “mas”, which meant “calf”. In the Hebrew language today, “mas” means “tax”.

As well as introducing the concept of lending, the Mesopotamians also invented money, in the form of a silver coin called the shekel.

This would replace the bartering system in which people traded goods or services for what they needed. It also led to money being lent with interest charges.

The first interest rates

The first interest rates – for grain, livestock and silver – were introduced by the Mesopotamian Babylonians in a set of regulations called the Code of Hammurabi.

The code, carved on a slab of black stone, established standards for trading and decreed that a lender could charge no more annual interest than 33 percent.

It also introduced collateral, albeit in a harsh form. The family of defaulting borrowers would have to submit to three years’ forced labour for the lender. The Babylonians were also tough on others who broke the law. Offenders could have their tongue, an ear or a hand cut off, for example.

However, the code was one of the earliest examples of an accused individual being presumed innocent until proven guilty. And if a harvest failed due to adverse weather, a borrower’s debt could be cancelled.

Bills of exchange

Bills of exchange – still used by traders today – are essentially binding, written IOUs that stipulate a certain amount of money must be paid at a predetermined date in the future.

Before paper currency, bills of exchange were far more commonplace than they are now for settling accounts in international trade.

One of the earliest recorded examples of a bill of exchange was in India 321 BCE. They were being used by Arab merchants in the eighth century AD, and by the Lombards of northern Italy in the 13th century.

Shakespeare gives moneylenders a bad name

You don’t have to be a Shakespeare scholar to have heard of the infamous fictional moneylender, Shylock.

There can be few who don’t know how the principal antagonist in The Merchant of Venice demanded a literal pound of flesh as security for a loan.

Written around 1596, the play isn’t best known for the merchant of the title, the Christian Antonio, but for his rival, Shylock, a Jewish moneylender.

This scenario can be seen as reflecting the prevailing anti-Semitic climate of the Elizabethan era, and the play would become a propaganda tool in Nazi Germany hundreds of years later.

A few years after publication of The Merchant of Venice, Shakespeare wrote Hamlet, in which Polonius declares: “Neither a borrower, nor a lender be.”

…But Shakespeare was a moneylender himself!

So, Shakespeare wasn’t a big fan of moneylenders, right? Actually, he was a tough tax-dodging moneylender and doggedly pursued those who owed him, according to some academics.

He became a moneylender on the back of profits he made from stockpiling grain during a time of severe shortage and selling it at inflated prices.

When it came to paying taxes, he didn’t, and at the time of his death he was the largest landowner in his home town of Stratford-upon-Avon.

Commercial finance and the Industrial Revolution

The Industrial Revolution took place from around 1760 to about 1820–1840 as new manufacturing technologies were introduced in Britain, continental Europe, and the USA.

It came about with the help of modern financial systems such as debt markets and stock markets developed in the 1600s. And as the Industrial Revolution grew, so did demand for more capital.

Banking developed alongside industry and technology during the Industrial Revolution – huge expansion of the financial system was essential to meet the needs of entrepreneurs.

Commercial finance in the 20th century

From the 18th century to the 20th century, London became world trade finance central, and a large market for bills of exchange emerged. Bills of exchange payable in London were used to finance commercial transactions across the world. This eventually became the global money market.

After the Second World War, it became clear that new trade finance solutions were needed to provide a more sophisticated system of financing solutions across a greater number of industries.

But international payments remained subject to tight government restrictions. The loosening of these regulations in the 1970s and 1980s resulted in a revival of international trade and increased demand for credit.

The 1980s also saw another major development in the world of commercial finance – online lending as digital technology evolved.

Commercial finance today

The online lending marketplace in the 21st century allows businesses to find unique matches with the best funding deals for their needs.

Business loan comparison sites abound on the internet, and credit brokers like V4B Business Finance provide a service for businesses looking to raise finance, taking care of the loan process from start to finish.

Looking through the history of commercial finance, it seems likely the industry will continue to evolve to meet the needs of businesses in the future.

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