Business Finance Planning
As a business owner, you're always making plans for your future. You're planning ahead on a daily, weekly and monthly basis, looking ahead to anticipate challenges and opportunities. Whether your business is in its early days or it's become established in its market, you'll always be thinking about tomorrow and what comes after.
A vital part of that planning is around finance - how you're going to pay for the people, the stock and the infrastructure you need not just to keep going, but also to grow the business. You want to avoid running out of working capital - cash - because that's the lifeblood of commerce. It's cashflow that makes or breaks a business.
For many, finance planning isn't the most exciting part of running your own business. But it is perhaps the most important task, and certainly one of the most rewarding when you get it right. Investing time in finance planning can literally pay dividends in the form of better cashflow and improved profits.
If you're undertaking any major new project in your business, such as launching a new product range or expanding your geographical market, you expect to put together a business plan. This covers all aspects of the project, including the financial element - this is your finance plan.
Here are our suggested steps for putting together that business finance plan.
Step 1 Know what you need and why
Most planning starts with having the end in mind. You have a vision for where you are going - such as opening branches in new locations, increasing turnover by a specific amount or becoming a recognised brand in a new market.
In your business plan you'll set out the steps you need to reach that destination. You'll identify your current strengths and weaknesses, also the opportunities and the threats.
The business plan will detail the actions you need to take, along with their anticipated costs. These are likely to include:
- Purchase of stock or equipment
- Marketing costs
- Employment costs
Your planning will also factor in the impact of new revenue streams, when your investment in growth begins to generate new sales. This should lead into a cashflow plan, where you document projected income and costs over time. The cashflow plan will help you to see how much funding you need and over what period of time.
Step 2 Understand your current numbers
Having planned for the future, you also need to have a strong grasp of where your business is today. Without a realistic understanding of current income and costs and the cashflow associated with these, it's hard to plan for the future.
However, you also need to be aware of other numbers in your business, such as the value and type of assets that you have and the existing levels of debt and their associated repayments.
Most businesses carry some form of debt, such as an overdraft, a loan or credit cards. Alternatively, there could be an obligation to repay an external investor, such as a business angel. While the expectation of repayment may still be some way in the future, it should be factored into your numbers and planning.
If you're looking for funding for a major new initiative that will grow or transform your business significantly, this presents an opportunity to restructure your firm's finances. You could consolidate existing small debts, or even do away with them entirely by taking on funding in a different form.
Step 3 Research your options
When you're raising funds to grow your business there are a number of routes you can take. Your choice depends on factors that include:
- Your credit rating
- Your attitude to risk
- How much control you're willing to give away
You should consider taking professional advice about raising finance for business growth, drawing on the knowledge and experience of others. Be sure to take into account the impact of taxation on your decisions. Take a look at how similar businesses are financing their projects.
It's possible that some of the assets your business owns can be used as collateral for finance, or used in another arrangement to release capital, such as a sale and lease back.
Where appropriate, involve others with a role in the management of the business, such as directors and other senior staff.
One major decision will be whether you decide to raise debt finance or equity finance. You can read more about this in our article 'Choosing the right funding option for your business'.
The more information you can gather at this point, the better informed your decision will be.
Step 4 Create your finance plan
As you pull together all the information you can start to make a finance plan based on your preferred funding options.
At the heart of your plan will be a cashflow forecast, which sets out the incoming and outgoing cash movements over time. This can be built in a spreadsheet or in a dedicated finance modeling app. Building the plan in a spreadsheet or app should allow you to adjust it based on different scenarios, helping you to assess the impact of various changes.
You may want to create alternative plans, based on different approaches to raising the finance - such as taking out a loan over several years versus receiving investment from a business angel.
Step 5 Review your plan in detail
Share your financial plan with others to get their feedback. Encourage them to question your assumptions and to suggest alternative options. The larger the project, the more important it is that you have a finance review by a professional, such as your accountant. An objective opinion from someone outside your business can be hugely valuable, particularly when they have experience of finance planning for similar projects.
Step 6 Source funding providers
Having thoroughly researched, built and tested your finance plan, it's time to approach potential funders. This could be a bank, a venture capitalist or a business angel, or some other provider of business funds. Your planning will have helped you identify at least one, and possibly several, funding options.
Depending on the scale and basis of the funding you're looking for, potential providers will have different questions and require specific information from you. This can include:
- Your firm's past financial performance
- How your business is managed
- Projected future cash flows
This information, along with other details about your proposed project, will be easy to supply if you've done a thorough job of your finance planning.
Funding your business project with Qardus
We work with owners who are looking to grow their small or medium-sized business. Having already proven their product and their process in the market, they're now seeking funds for major growth initiatives.
The funding we provide is from £50k to £200k with terms of between 6 and 36 months.
We're different from banks and most other UK finance providers because we don't charge interest. Our funding arrangements are rooted in Islamic community principles and are certified as Sharia-compliant. This also means we don't work in business sectors considered damaging to society, such as alcohol, tobacco or gambling.
Because of our principles, our funding solution is proving a popular choice not only with Muslim business owners, but also with others committed to ethical and community values.
Talk to us about getting access to fast and flexible growth finance.
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The investment term for this offer has been successfully concluded
As the investment term for this facility has been successfully concluded we wanted to present some highlights of this offer to investors:
The problem: Dara 77 Ltd, a dental practice, was seeking funds for working capital, to purchase dentistry equipment, and refinance an expensive mycashloan of c.£30,500 at c.50% APR.
The solution: In order to refinance the expensive loan at the earliest possible time and meet their working capital requirements, the company needed a timely injection of business finance. Dara 77 Ltd hence sought to raise a total of up to £60,000 of Sharia-compliant finance on the Qardus platform.
The outcome: The company had a two-year unsecured amortizing finance facility with Qardus, giving it the capital required to support their next phase and pay-off the expensive loan. The funds were drawn down on January 28, 2021.
Final settlement: Dara 77 Ltd made a voluntary early prepayment for the full outstanding balance of the financing facility on May 12, 2022. The Director used the extra cash proceeds from the sale of her home to pay off all her debts.
Payments to investors:Over the term of the facility, investors received their scheduled profit and principal payments each month.
Returns to investors: Investors made a return of 16.2% per year over the term of the facility. An investment in this offer made a return on investment (ROI) of 20.88%andXIRR of 25.31%upon successful conclusion of the investment term. The XIRR function calculates the Internal Rate of Return (IRR) by assigning specific dates to each individual cash flow.
“Excellent service from start to finish, comprehensive and friendly staff that make the full process feel easy. I was seeking growth finance and contacted Qardus and within 5 business days, I had an offer and funds in the bank. Highly recommend, thank you again Qardus”Director, Dental Practice
“This business is a prime example of a UK SME which has strong social impact credentials and that our investors are keen to support. This was also the first female owned business on our platform that got funded in 6 hours! In addition to providing working capital headroom, the funding will also be used by the business to refinance an expensive loan at c.50% APR. With this financing facility, we look forward to watching this business grow”Hassan Daher, CEO & Founder, Qardus Limited
Please remember that when investing in the offers available on the Qardus platform your capital is at risk and returns are not guaranteed. Past performance is not indicative of future results.
WHAT IS A VENTURE CAPITAL TRUST?
A venture capital trust (VCT) is essentially an investment company. In the UK the government introduced VCTs in 1995 as a way of ensuring that investors could invest in start-up companies. The government was keen to encourage investment in entrepreneurial businesses by offering tax relief to investors. Recently there has been discussion and debate about whether VCTs are halal or haram.
For new businesses, VCTs are a great way of raising investment, and for investors they are an opportunity to invest in upcoming businesses.
For anyone looking for Sharia compliant investing, VCTs can be a good opportunity to invest in a halal way. Investing in VCTs can be halal, but you have to ensure that the VCT you invest in complies with Sharia rules about investment and financial transactions.
In recent years, as the Islamic finance market has expanded so too has the desire for Sharia compliant VCTs. The Islamic VCT market is innovative and presents a viable alternative to conventional investment models which are not always acceptable to Muslims who want to invest in line with Sharia rules.
Whilst it is always a personal choice as to where investors want to invest, for Muslims there are additional considerations that require them to be mindful of Islamic laws.
Let's have a look at how VCTs work and how they can operate in a halal way.
HOW DO VENTURE CAPITAL TRUSTS WORK?
VCTs work by raising money and then using the funds to invest in new and innovative companies. Usually these companies are innovative and privately owned. The idea is that the investment raised is then used to generate a profit and solid return for the investment.
The company can be dealing in products and services, offering employment opportunities, and/or meeting a need in the economy. The number of companies seeking investment is never-ending.
As an investor in a VCT, the investor becomes a shareholder of the trust. It is important to note that the investor does not become a shareholder of each individual company, rather the investor becomes a shareholder of the trust in its entirety.
Most VCTs will invest in different companies. This enables the VCT to keep its investment portfolio options diverse and spreads the risk. It is always important to ensure you have all the information you need about the VCT before investing.
When the companies within the trust return a profit, this is paid over to the shareholders.
WHAT DO VENTURE CAPITAL TRUSTS INVEST IN?
Most VCTs will invest in new, small, and entrepreneurial companies across a wide variety of sectors. These can include tech companies, retail, clothing brands, food outlets and many more.
Many of these companies will be privately owned, and some of them are quoted on the Alternative Investment Market or the London Stock Exchange.
Different Types Of Venture Capital Trusts
There are some different types of VCTs. What differentiates them from each other is the investment focus and area:
- specialist VCTs : these are VCTs that remain focused on a specific interest and sector. For example, there are VCTs that only invest in healthcare, or retail. Due to the lack of choice and sector diversification, this often means that they can carry more risk.
- Generalist VCTs : these types of VCT are wide-ranging when it comes to investment. They invest in companies across different sectors. The value to the investor is that there is diversification and less risk.
- AIM VCTs : the Alternative Index Market (AIM) VCTs invest in shares issued by AIM quoted companies. The AIM was set up by the London Stock Exchange in 1995 to ensure that there was a market for companies who can't (or won't) meet the demanding requirements for listing on the London Stock Exchange.
Venture Capital Trusts And Tax Advantages
One of the main reasons VCTs are popular is that they offer tax incentives. Investors can take advantage of:
- tax free dividends
- up to 30% income tax relief
- tax free growth
- capital gains tax exemptions and deferrals
WHAT IS VENTURE CAPITAL TRUST TAX RELIEF?
VCT tax relief can be claimed when an income tax return is filed with HMRC.
What this means for investors is that they can end up with a lower income tax bill, or even a refund if they have already paid their tax.
Islamic Finance And Venture Capital Trusts
Remember, one of the most critical elements of ensuring compliance with Sharia law when investing in venture capital trusts is that you need to work with a Sharia aware, and Sharia compliant, financial advisor.
This will ensure that the investment contract AND investment models are both compliant with Islamic finance rules.
Islamic Venture Capital Trusts Vs Conventional Capital Trusts
The main difference between conventional VCTs and Islamic VCTs is that Islamic VCTs must comply with Islamic finance rules relating to finance and financial transactions.
Islamic VCTs need to stay away from any form of investment in non-permissible, or haram, industries.
A very simple example of this would be as follows: a conventional VCT could invest in brewery shares. However, an Islamic VCT should stay away from any alcohol related industry.
Going further, anyone looking to invest in Sharia compliant VCTs should do additional due diligence and ask questions about the company they invest in. Does it operate ethically? Does it have conventional debts on its book that is interest-based? If so, then the VCT is not considered to be halal.
Advantages Of Investing In Venture Capital Trusts For Muslims
As long as the VCT is Sharia compliant, Muslim investors offer a diverse range of investment options. Muslim investors can take advantage of investing in other Muslim businesses and industries.
There are numerous ethical investment opportunities with halal VCTs that are attractive to Muslims. Socially responsible investing is a core principle of Islamic finance and there are VCTs out there that are ethical and socially responsible.
Halal VCTs also offer the potential for job creation with early stage companies. Supporting these businesses mean Muslims can indirectly be helping struggling economies and economic development. This aligns with the Islamic finance principles that relate to promoting economic wellbeing and financial inclusion.
WHAT IS WAKALA?
Wakala is a popular model Islamic VCTs when it comes to raising capital.
Wakala permits the asset manager of the trust (on behalf of the investor) to act on their behalf based on agreed conditions and terms.
Both parties then share the profits generated, and take on the risk of any losses together. This kind of profit and loss sharing arrangement aligns with Islamic finance principles.
Mudaraba And Venture Capital Trusts
When it comes to investing in start up companies, mudaraba is a common model that is used. The mudaraba contract is a contract that enables one party to the contract to bring assets in and for the other party to bring in effort and experience.
This means that investor provides the financing, and the entrepreneur takes responsibility for the day to day management of the trust. The contract outlines the respective responsibilities of each party and the profit sharing arrangement.
As already mentioned, despite the many advantages of halal VCTs, investors need to work with Sharia compliant advisors who can direct them to halal VCTs.
Consulting with knowledgeable advisors means you have specific guidance and adherence to Sharia rules.
Introduction:
In a world increasingly driven by consumer culture and financialisation, debt has become a ubiquitous aspect of life for many individuals and nations. Islam offers profound insights into the handling of debt, encouraging timely repayment and promoting a life free of debt. Debt is a serious matter in Islam. It is a responsibility that should not be taken lightly or neglected. The Prophet (peace and blessings of Allah be upon him) used to seek refuge with Allah from being overburdened by debt and he warned against lying and breaking promises when dealing with debt. In this article, we will explore some of the Islamic teachings and principles regarding debt and how to repay it in a timely and ethical manner.
The Islamic View On Debt
Islam does not prohibit debt; it recognises the fact that people may face circumstances that necessitate borrowing. However, it emphasises caution, responsibility, and most importantly, the intention and effort to repay the debt promptly. One of the foundational elements in Islamic financial ethics is the prohibition of 'Riba' (usury or interest). This reflects, among many other things, the Islamic principle of social justice, ensuring that the burden of risk is not disproportionately placed on the borrower and preventing exploitative lending practices. Here, the Shariah protects the borrowers and debtors. The Shariah encourages lenders to go easy with debtors, and in fact, Shariah promotes helping those struggling with interest-free loans as well as grants.
The Virtue Of Prompt Repayment
Shariah is a perfect balance. Whilst it has guidance addressed to the creditor to guide their conduct, Shariah also protects creditors and lenders, and has guidance addressed to borrowers and debtors. The following guidance shows how Shariah balances the rights and ensures everyone’s rights are upheld.
The virtues of repaying debts promptly are emphasised throughout the teachings of the Prophet (peace and blessings of Allah be upon him). Paying off debt is a virtue and a means of attaining Allah's reward and forgiveness. It is a way of fulfilling one's duty and honouring one's trust. It is also a way of expressing gratitude and kindness to the creditor who helped the debtor in his time of need.
The Prophet (peace and blessings of Allah be upon him) said, "Whoever takes a loan intending to repay it, Allah will help him, and whoever takes a loan intending to waste it, Allah will destroy him." [Sunan Ibn Majah]
He also said, "If anyone remits anything from a debt owed to him, he will have that amount recorded for him as a charity." [Sunan Abu Dawud]
In another Hadith it was reported: "The soul of the believer is suspended because of the debt until it is settled." [Tirmidhi] This Hadith indicates the serious implications of dying in a state of debt and underscores the urgency of repayment.
The Prophet (peace and blessings of Allah be upon him) would supplicate to Allah to save him from debt. He would say, “O Allah, I seek refuge in You from a soul that does not satisfy and from a heart that does not humble itself and from a supplication not heard and from knowledge that does not benefit and from a deed not raised up and from a debt that never ends.” (Musnad Ahmad)
In another narration, the Prophet (peace and blessings of Allah be upon him) sought Allah’s refuge from debt. Abdullah ibn Umar narrates, "When the Prophet contracted a debt transaction, he would say: O Allah, I seek refuge in Thee from care and sorrow, from incapacity and laziness, from stinginess and cowardice, and I seek refuge in Thee from the burden of debt and from being humbled by people." [Abu Dawud]
Whilst prompt payment has been encouraged, unjustified delay has severe warnings. Abu Hurairah reported that the Messenger of Allah said: "Procrastination (delay) in repaying debts by a wealthy person is injustice." [Bukhari]
Hence, the AAOIFI Standards unequivocally state: “Default in payment by a debtor who is capable of paying the debt is Haram (prohibited).”
In one narration, he said: “Delay in payment by a solvent debtor would be a legal ground for his being publicly dishonoured and punished.” [Musnad Ahmad]
Advice To The Creditors
Islam is beautiful in that it addresses all parties with that which concerns them. Each party is given guidance to ensure that they are doing their best that they can do, that they are being the best version of themselves. Just as debtors are warned on delaying payment unnecessarily, creditors are encouraged to go easy. Giving loans to the needy is a noble act of charity and kindness in Islam. It is a way of helping others and relieving their distress.
The Prophet (peace and blessings of Allah be upon him) said, "A man would give loans to the people and he would say to his servant: If the debtor is in hardship you should forgive the debt that perhaps Allah will relieve us. So when he met Allah, then Allah relieved him." [Sahih Bukhari]
It is also encouraged to give respite or deferment to the debtor if he is unable to pay on time. The Prophet (peace and blessings of Allah be upon him) said: “Whoever gives respite to one in difficulty, he will have (the reward of) an act of charity for each day. Whoever gives him respite after payment becomes due, will have (the reward of) an act of charity equal to (the amount of the loan) for each day.” [Sunan Ibn Majah]
Moreover, it is permissible to reduce the amount of the debt or waive it altogether as a gesture of generosity and goodwill. The Prophet (peace and blessings of Allah be upon him) said, "If anyone remits anything from a debt owed to him he will have that amount recorded for him as a charity." [Sunan Abu Dawud]
Debt And Society: A Broader Perspective
Islam does not just focus on individual actions but also considers social responsibilities and collective well-being. Helping those in debt is seen as a meritorious act, leading to divine reward.
In one narration, it is stated, "Whoever relieves a believer's distress of the distressful aspects of this world, Allah will rescue him from a difficulty of the difficulties of the Hereafter… and whoever alleviates [the situation of] one in dire straits who cannot repay his debt, Allah will alleviate his lot in both this world and in the Hereafter." [Sahih Muslim]
The Practical Aspect: Managing Debt
Given the emphasis on prompt debt repayment and avoiding debt where possible, Islam encourages pragmatic approaches to financial management. This includes effective budgeting, prudent spending, and exploration of viable income sources before resorting to borrowing. Furthermore, when borrowing is deemed necessary, it encourages a clear understanding and documentation of the debt terms to prevent future disputes or misunderstandings.
Conclusion
In the Islamic worldview, debt is not merely a financial issue but a matter involving ethics, morality, and social responsibility. While borrowing is not prohibited, there is a clear emphasis on the virtues of prompt repayment and the spiritual and ethical implications of living a debt-free life. Furthermore, the alleviation of others' debt is seen as a meritorious act, showcasing the communal and compassionate dimensions of Islamic financial ethics.This holistic approach can offer valuable insights for contemporary societies grappling with the ethical and societal implications of widespread indebtedness. Ultimately, the Islamic teachings on debt prompt individuals to practice responsible borrowing, timely repayment, and to strive for a life free from the burdens of debt.
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