Renting Money

Today I got an e-mail from Peter Carruthers, who sends an e-mail newsletter around on a weekly basis concerning South African small businesses. The bits of wisdom he brings up in his no-nonsense style go way beyond South Africa, so I will from time to time expound on the topics in his newsletters.

As his first newsletter of the year was a bit low on content, however, I went to his Crashproof Your Business website, where he talks about banking from the perspective of small business owners.

Unlike banks in Europe and the U.S., banks here in South Africa were not exposed directly to the subprime-lending crisis in the American housing market. Though there have been increased rates of foreclosure, as the economic crisis and credit crunch have been felt even in Africa, banks here have come out relatively unscathed.

I'm not going to beat that dead horse today. I bring up banks because most business owners depend upon banks for credit to maintain their cash flow. Peter Carruthers makes several discerning, and universal, observations about banks. I make note briefly of them here:

1. Banks make money primarily from the rental of their money to you.
2. Interest is the price of the money you are renting.
3. The bank wants to make as much money off of this rental, while you want to pay the lowest price for it, just as with any other product or service.
4. Banks want security, so will only rent their money to people who have something of value, and will only rent this money and (in theory) if you cannot pay the rent, they will take the assets you put up as security.
5. Always remember that the bank is not your friend, but a supplier of services.

Of course, this shows us where the banks in the U.S. failed. Security could not be found in those high risk, subprime loans and the collapse of the American real estate market essentially took away what security the banks had, which led to where we are now.

(Originally published at The Creating Wealth Blog on 1/8/09)