Achim,
well, sure, if a company with 60 employees still qualifies as “very small”, then you are right. I am well aware that VW or Mercedes cannot run their businessed without banks. But i am glad that we can, and that’s all i wanted to say.
You didn’t build that business 3 years ago by hiring 60 staff, did you? If you came to the conclusion that there is a business opportunity by investing let’s say 10m€ to acquire another company, external funds would be needed. There is no simple truth like “it’s better without banks”. Years ago I had a business that was really printing cash but still I needed $10m quickly to expand to the US market which was far bigger than our European home markets. Very often you’re missing out an opportunities and you might even disappear when you limit your investment to what your cash flow allows.
And if you don’t qualify for bank loans or don’t want them, you can always invite the JasonCs of this world to fund your plans. They’re definitely taking market share from the banks, especially in Germany where companies are more bank-focused than anywhere else 
The crash changed everything, and up until last year, a lot of the banks, and business, were working to the old model. That old model, was a trusted bank, a place to invest your money and receive a return, with that invested money, the banks used it to make more money. By investment, Forex, markets commodities etc. And lending to business and individuals. Due to their inherent criminality in a lot of cases, the banks have well and truly fallen off the mantle. Anyone with a modicum of common sense, will now realise that these financial institutions had only one common interest. Themselves, and greed. Naturally, at our expense. I see around me, banks offloading properties, built for 14million, for 400k. These are the so called toxic assets, and guess who is again paying for that. It is happening today, and the banks still have not dealt with these toxic assets, and personal credit. It is for the time being, hidden. We are in for a further decade of very low interest rates and austerity. With that comes difficult lending, and borrowing…
I really think we have to differentiate a bit.
One trend I see and am very unhappy with is that in particular young people will no longer see that in order to have something you have to work for it and save up, but it has to happen NOW and IMMEDIATELY. It does not occurr to them that if they can´t pay for something with their own money, they simply can´t afford it. There is no God given “right” to have things you can´t afford and by taking up consumer credits with often horriffic conditions, they end up in deep debt which will hamper their whole further lifes. Or they simply go bancrupt and think that is the end of their problems, well, it isn´t. Stuff like that follows you around for the rest of your life.
One variant of this which I am violently opposed against is people who take out credits to do their ATPL, despite the well known fact that a HUGE percentage of people who do this will NEVER have a job as a pilot, but will be sitting on a licence they can not use and on several hundred k of debt. They flood the market as absolutely desperate and ready to work for whatever conditions they are offered because they have no choice at that point. Well, they had the choice before they signed the dotted line.
I did all this, but without credit, so it took me almost 10 years to finish my then frozen ATPL and I never got a job. So yes, I lost all the money I put into my license, but at least I did not have to worry about a debt. Yes, you CAN work and save for such undertakings and you´d better do it. Clearly, cost of training has increased massively over the last decades but still, in this regard, I very much think that the old moniker “if you have to ask for credit, you can´t afford it” is a simple truth.
The same goes of course for buying airplanes for private use (or any other consumer goods). If I see people buying airplanes or cars e.t.c. I know they can´t afford, they have to be leased or financed, I feel uneasy and I won´t trust such people as they are likely not to be very disciplined and have a real view of themselfs but are somehow with their head in the clouds and a “live now, damn later” attitude which also does not really imply that their decision making as pilots are very good.
You can do the same things with a 1960ties high performance airplane which you can buy at a MUCH lower price than one of the brand new types, even after they have lost 3/4 of their value in the first year. So why take a credit to buy a 250 k airplane just because it “looks better” or is “shiny and new” if you can achieve the exactly same trips and experiences with a 50-100k aircraft you can actually afford? Or, same gripe, folks with a new car every year with leasing stickers on them rather than a much higher class car they could pick up for very few money? Why do they have to pick up a brand new TV at the shop on credit, if their old one will be more than adequate until they save up for the new one? This kind of rat catching credits in my opinion should be massively restricted as it is obvious that many people simply have lost any sense of what they can or should afford themelfs.
It is different with housing. It is highly unrealistic (and for reasons mentioned also not economical) to be able to buy properties in full cash. Likewise, it is much cheaper to buy properties with mortage credits than to live for rent, certainly where I live. But again, I am violently opposed to getting over one´s head and take out HUGE mortages which with the current low interest rates can “just” be paid, but which will cause major aggravations if interest goes double or tripple.
Yet again a totally different thing is businesses. Most businesses today need financing and that there is financing is a good thing as long as it is done with due diligence and within reason. Yet that is no free for all to simply borrow until the company can´t possibly pay back their loans, but to have a loan for a short term or long term investment may be useful as long as the risk remains within proportions.
We can see even today what it really means if any entity volontarily or by force ends up in a situation where credits simply have no hope of being paid back. The situation in Greece comes to mind, where a whole nation is now enslaved to the moneylenders who in full knowledge of the implications kept feeding money into a bottomless pit, with, imho, clear ideas on how to exploit this situation once it gets out of hand. The same can happen in business or private dealings, if working with the wrong people. And regardless if it is a business, a country or a private citizen, nobody should ever live beyond his means, and that goes particularly when it comes to credits.
Well construed Mooney. Stripped back, a society wanting everything, now, but no means to pay for it. I am currently watching another bubble growing. STUDENTS. Everywhere I look, office blocks being converted to Student Accommodation. Masses of Chinese and Japanese students are arriving to fill the universities. All paying a lot of money. Watch the bubble grow, and burst, obviously……..
Can I take a different tack on this – relevant to aircraft, and practicalities.
Ownership of an aircraft is like getting a puppy – you really want it, but it is a substantial commitment of time and money in the future that is not easily avoided, or gotten rid of. So if I buy a twin and to fly it, I am committing, say, 50k a year, and in a pinch I can reduce this to say 20k without endangering the asset, and it will take a year to sell from the time I decide to do so.
If I get 100k at 5% interest-only to fund this toy, this goes up to 55k / 25k, respectively, hardly a game changer. Buying a better specimen with a loan might even lead to lower running cost, but that is a bit of a lottery.
The trouble starts if my outlook changes, so let’s say my income goes to zero. I HAVE TO get rid of the aircraft. If the sale price is lower than when I bought it – tough luck, but the money was spent some time ago. If the sale price is lower than the mortgage, then I now have to stump up cash I no longer earn, so I am in trouble.
So the conservative rule should be – “never buy an aircraft/car/boat unless you are certain the sale price will exceed the loan + the running cost for the time it takes to sell the thing”. This applies even if the loan is zero…
So the conservative rule should be – “never buy an aircraft/car/boat unless you are certain the sale price will exceed the loan + the running cost for the time it takes to sell the thing”. This applies even if the loan is zero…
I can’t imagine being in a situation with an aircraft where I couldn’t (on a financial basis) put a match to it and watch it burn! That is doubly true given the number of nice aircraft available at affordable prices.
Re mortgages, I’ve borrowed about €600K in the last two months, rented a house to cover cost of the interest (that I can’t otherwise afford) and etc. We now have three such rentals, and are happy to collect rent from those who don’t want mortgages. That’s certainly all the risk I need to take, but I do it for a reason. Aircraft and the like are for fun, what you can do with the money you make. They are not financial instruments, they are toys with which you reward yourself after you have the money.
office blocks being converted to Student Accommodation. Masses of Chinese and Japanese students are arriving to fill the universities. All paying a lot of money. Watch the bubble grow, and burst, obviously……..
This one won’t burst all the time these Chinese etc students are sent over by their families to get “high grade western” education so they can come back and run their family business (or whatever) with a “high grade MBA” in risk management of breeding chickens (or whatever) which they get by massively plagiarising stuff from google, often to the extent of leaving in page numbers from the ripped off source within the final text of their essay (I’ve seen this – I know someone who used to do Masters and PhD marking/supervision)
The risk is in “respected” European universities going out of favour and these people going to the USA instead, where the standards are higher anyway. That would kill many English-language European universities, because they milk foreign students for all they are worth while tolerating plagiarism on a massive and totally in-your-face scale.
U.S. universities (including state run universities) have been funded by high paying foreign students for a long time, as have the flight schools. It’s a very long period bubble and to the extent it inevitably creates the highest quality immigrants, it’s a positive thing.
Flyer59 wrote:
He used to say (he died this year) “a bank will give you an umbrella when the sun shines – and take it away when it starts raining”.
My father also used the same quote
