There is nothing special about flight training in this.
Actually there is: a well above average % of aviation businesses are dodgy. The business seems to attract all kinds of characters. You find them running schools, maintenance companies, you name it.
For every person who loses their money in this way through a flight school, countless others get exactly what they've paid for.
True but when a school goes down, a whole load of students lose their money all in one go. It's a bit like saying it's OK to give all customers credit for £20k because, on average, most won't go bust right away.
There are many reputable companies who's business model relies on advance payments (by this I don't mean they would go bankrupt otherwise, I mean that their business model is designed for it)
Can you please elaborate on the "business model" which relies on borrowing large sums from customers? I am quite interested.