The Story of Bank Lending and Small Businesses

Through the ages, people have borrowed money from lenders to fund businesses of all scales, from the smallest businesses to multi-national enterprises. It has been and continues to be an important part of the engine that keeps capitalism running. In this piece, we’ll explore the evolution of this age-long practice and evaluate the difference it makes for entrepreneurs today.

Evolution of lending

The ancient Greeks and Romans used one of oldest known money lending practices which still prevails today; pawnbrokers would offer secure loans to borrowers while holding items of personal property as collateral.

In the Middle Ages, Jewish lenders offered loans which were repayable with interest while Christians were barred from lending money with interest. Still within this period and through the 19th century, the wealthy offered indentured loans to the poorer ones where the borrower would have to work on the lender’s estate to work off their debt.

The term “bank” came from “banca” which were the benches where money lenders would conduct their business from. “Bankrupt” emerged from the term “banca rupta” which was used to refer to the action where a lender would smash his bench when he ceased trading.

International banking has its roots in the business of the wealthy Rothschilds family. In the late 18th century, Mayer Amschel Rothschild scattered his sons across five cities in Europe and created a network for making money transfers. For 85 years between 1919 and 2004, Rothschild Bank offices were the locations used for fixing the daily gold price. In 1775, the landlord of an inn founded Ketley’s Building Society in Birmingham, marking the beginning of building societies. Members were able to build houses using money from monthly member subscriptions.

In the early 19th century, the Philadelphia Savings Fund Society marked a new era in lending when it was created, providing people with a way to save money and access loans. Mortgage financing was born in 1932 when the US congress founded the Federal Home Loan Bank system to provide support for local financial institutions who were providing residential mortgage loans. All through the rest of the 90s, credit cards quickly rose to become a popular method of making payments, increasing the volume of lending.

Peer-to-peer lending was ushered in when Zopa began to offer peer-to-peer loans in the UK in 2005. Since then, the company has lent over £2 million over its online platform. Peer-to-peer lending, often shortened to P2P lending entails lending money to a business or an individual using an online service that matches borrowers with lenders.

The practice of lending has come a long way since the days of the Jewish money lenders, and while people borrow money for a variety of reasons, borrowing to finance a business is one of the most crucial reasons, or at least it’s the reason we are more concerned with.

Why we take business loans

Perhaps you have tried other means of raising capital and they are simply not forthcoming. While it isn’t super easy to get a bank to give you a loan for a brand new business, in some cases, a bank loan is the only choice you have. What’s more, it can get frustrating trying to find the right small business loan as there are a myriad of options out there. Luckily, there are resources that can help you find small business grants such as this one offered by LendGenius. Whether you are starting out a new business or trying to grow an existing one, there are a number of good reasons to take a business loan:

• You’re buying real estate and expanding your business

You are likely to want to expand your business and move to a bigger, better location when your company is turning a profit and looking good for the future. At this point, you have more employees than your current location can accommodate and maybe you’re adding new features to your service which would require more room to operate seamlessly. Your business is ready for that long awaited expansion and you don’t have the funds to see it through. This certainly sounds like the time to head to the bank for a loan, and the good news is they’ll likely be willing to give it to you since you’re doing so well.

• You need to increase working capital

Let’s say you’ve started your small business but you’re certain you won’t survive for long if you don’t raise enough money to manage your daily operations. This could be a good enough reason to head to the bank for a loan, especially when there are no other options available. With a working capital loan, you’ll have access to enough funds to keep your business running until you start making enough money to sustain the business.

• You need more/better equipment

Maybe you’ve decided to buy equipment and not lease, whether it’s new equipment or you need an upgrade. Whatever the case, you don’t have direct access to the money needed to pay for the equipment and think it’s time to seek out an equipment loan. When you think of how much your business will benefit from the new equipment, you are certain you have more than enough reason to take a loan.

• You need to purchase inventory

If yours is a seasonal business and you need to buy stock before a busy season but don’t have enough cash, you can get a short-term loan from a bank to take care of the cost of purchasing inventory. After the massive sales you must have made during the season, you’ll be able to pay back the loan in no time.

Ultimate advantage of bank lending

The best part about getting a loan from a bank is the bank will not ask for a piece of equity in your business, unlike angel investors or some of the other sources of funding. All the banks want is a return on their investment after a specified period of time.