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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As more and more people attempt to get their foot onto the property ladder, this article will examine in detail the alternatives to conventional mortgages. In recent years there has been significant growth in alternatives to traditional mortgages, and what this means in principle is more choice for those looking to purchase assets or property in a Sharia compliant way.
There are many different reasons why people look for alternatives to mortgages:
- Flexibility: people want more flexibility when it comes to financing property or asset purchases.
- Accessibility: for some investors, alternatives to interest-based mortgage products are problematic as they contravene Islamic finance rules and ethical investment principles.
- Cost: alternative mortgage products can be cheaper overall than the standard mortgage products available in the UK, especially for those with poor credit scores.
- Less risky: there is sometimes less risk associated with alternative mortgages.
ALTERNATIVE MORTGAGES - WHY?
A conventional mortgage arrangement exists as a loan between a lender (bank) and an individual or company. The lender lends you the money to buy the property and in return, the borrower repays the money they have borrowed plus interest.
The mortgage loan itself is secured against the property and against the value of the property.
For many potential homeowners, a conventional mortgage is not a viable option, especially those looking for Islamic finance or ethical mortgages.
One of the main reasons traditional mortgages are shunned is that they are interest-centred and therefore not Sharia compliant. This has led to Muslims and ethical investors looking for alternative financial products to source funding when buying a property.
Interest is strictly prohibited under Islamic finance rules, so Muslims have had to look outside the traditional mortgage market in order to secure funding for their real estate and asset purchases.
However, it is not only Muslims who are looking at the market for alternatives to traditional mortgage products and services. As the ethical finance market continues to grow, many ethical investors and purchasers are also looking to secure funding that comes without hefty interest payments and charges.
Islamic banks and products under the Islamic finance banner are often considered to be a safer option than the finance options available on the mainstream finance market. The reason for this is that they are seen as less risky and less speculative.
Let's have a look at the alternatives out there and whether or not they are deemed to be halal or haram under Sharia rules.
Buy To Let Loans
Buy-to-let mortgage loans are designed for those people or businesses who want to purchase real estate properties with the purpose of renting the property out. Once the property is let, the homeowner then generates revenue through the rent payments they receive from the tenant.
Normally, these types of mortgages are based on higher interest rates than conventional mortgages and for this reason alone they are not Sharia compliant and are deemed to be haram.
There are some Islamic banks within the UK that offer a buy-to-let mortgage product, and if you want to review what is on offer you need to make sure that the product is 100% Sharia compliant.
Certainly, conventional buy-to-let mortgages that include interest in the repayment structure are not permissible for Muslims.
Home Purchase Plans
Home purchase plans are structured to avoid the charging and paying of interest. Normally a home purchase plan will involve the bank and the homeowner taking part in a shared investment strategy.
The bank, or financial institution, will purchase the property outright on behalf of the homeowner. The bank and the homeowner will agree the payments that the homeowner will make to the bank in lieu of repayment.
The homeowner will then make the repayments to the bank until they have paid off the pre-agreed price of the property. Once all the payments have been made the homeowner will own the property outright.
Home purchase plans give customers the opportunity to get on the property ladder in a halal and Sharia compliant way.
This type of co-ownership arrangement means the bank and the borrower share the risk and no interest is payable.
Shared Ownership Schemes
A shared ownership mortgage enables the purchaser to buy a share of the property. The purchaser then pays rent on the remaining share which is often owned by a non-profit organisation such as a registered social housing provider.
Shared ownership schemes were developed to enable people to get on the property ladder in an affordable way.
When structured correctly, shared ownership mortgages can be halal. If the share (of ownership) being purchased is clearly defined, and the rent on the remaining share is based on payments which are fair then this could be considered a halal alternative to an interest-based mortgage.
Make sure that the rental payments do not attract any interest, and that the terms and conditions of the ownership scheme are clear and concise. In the United Kingdom, shared ownership schemes are regulated and can often be an effective way to get on the property ladder.
If you are interested in a shared ownership scheme, look to see if they are being offered in your local area, and then look to see if any Islamic banks are offering shared ownership services.
Guarantor Mortgages
Guarantor mortgages are for those people who are unable to purchase a property, or secure funding to make the purchase, on their own.
A guarantor is involved who guarantees that they will repay the mortgage loan amount if the borrower does not make the payments.
Usually, the guarantor is a family member or close friend.
Whilst Islamic finance does permit the concept of a guarantor, in order for the service to be halal it needs to follow Sharia rules relating to such transactions. For example, a guarantor can be involved in a joint purchase transaction. In this type of financial transaction, the guarantor owns a share of the property and the risks are shared.
This is a musharakah arrangement - that is a profit-sharing arrangement or partnership.
If the guarantor mortgage is simply one where the guarantor guarantees the loan repayments with zero ownership rights then this is not permissible under Sharia rules.
Crowdfunding
Crowdfunding is a relatively new alternative to conventional mortgages. In its very basic form, crowdfunding operates by way of a collection of funds from a crowd of people (investors).
Whilst historically, investment markets have tended to be reliant on interest. However, Islamic crowdfunding is an activity that is deemed to be halal. Funds collected from a community have never been prohibited. In fact, crowdfunding in its very essence can have a positive social impact and this is a key principle of Islamic finance - social responsibility and ethical finance.
Anyone considering crowdfunding should ensure that the crowdfunding arrangement is set up to be fully Sharia compliant.
Self-Build Mortgages
Self-build mortgages are for those people who want to build their own homes. What this means in principle is that the loan is released to the borrower in stages that coincide with the stages of the build taking place. The final loan amount if based on the value of the property once it has been fully completed.
This type of alternative to the conventional mortgage is not halal as it still incurs the same type of interest payment as a standard up-front mortgage does.
Conclusions
Muslims have been wanting Sharia compliant alternatives to standard mortgages for many years. To address this, banks in England and other western economies have developed Sharia compliant alternatives that enable Muslim and ethical investors to buy a house or a business property/asset.
Halal alternatives to interest-based mortgages have several unique features. They are less risky, less speculative, and more socially responsible.
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.
Islamic car finance is available for Muslims wanting Sharia compliant options. What halal finance options do Muslims have and how do they work?
There is a huge array of car financing and leasing options on the market for those who do not want to buy a car outright. For Muslims, the car finance options available can be difficult to navigate, especially if they want finance and leasing options that are not in contravention of Islamic finance options.
Islamic car finance operates to enable people to use their money wisely, spread the actual cost of financing the car whilst ensuring that they do not pay interest on the finance option they have chosen. Drivers can take advantage of car finance deals whilst also adhering to Islamic Sharia rules relating to interest (the payment and receipt of which is prohibited) and speculation.
The halal car finance market is aimed at those people who want Sharia compliant finance options. Essentially, for those people who do not have the cash to buy a car outright, or those who do not want to buy a car paying cash, Islamic finance ensures that people can spread the cost of the car without breaching Sharia rules.
Islamic Finance Principles Applied To Car Finance
The main Islamic finance principles relating to car finance are:
1. Riba (Interest) - Islam prohibits the receipt or payment of interest. It is deemed to be haram. In car finance terms, this means that Muslims who want to remain Sharia compliant cannot borrow funds with an Annual Percentage Rate (APR) attached. An APR is an interest rate and is prohibited in Islam.
2. Simplicity of Contracts: Islamic Sharia principles dictate that transactions should always be honest, transparent and open. This means that if you enter into a contract for leasing a car you should make sure that there is no undue risk, speculation, or gambling involved. The contract should be fair for both parties and be simple to interpret.
Buying A Car Outright Without Car Finance
It goes without saying that buying a car outright with a cash payment is probably the best option for those wanting to remain strictly Sharia compliant. If you have savings that would cover the purchase of the car you can avoid interest payments and APR. However, not all Muslims have the option of paying cash outright for a car and this is where the market has developed to cater to the needs of those wanting Sharia compliant car finance options.
Car Finance Options - Leasing
Islam does not prohibit leasing (ijara). In fact, leasing is permissible and is compatible with Islamic finance principles. Payments for vehicles can be done via leasing contracts with car companies. Sharia does not prohibit car leasing agreements because the heart of the transaction relates to a tangible asset - the car. As long as the leasing contract sets out the terms of the lease, the details of the parties, and the payments it can be structured to be compliant with Islamic finance rules.HOW DOES HALAL CAR FINANCE WORK?
Halal car finance is actually straightforward, working on the basis of a loan being agreed between the parties. The buyer and seller in the transaction agree on the value of the car the seller is selling. The seller does not charge an interest rate for payment of the car as they would normally to make money on the finance arrangement. Instead, the seller increases the purchase price of the car to cover the interest payments they would have received. No interest is actually charged by a bank or the seller.
What this means for the buyer is that the deposit will be higher than a deposit they would pay on a non-halal car finance option, but for Muslims this is a halal way of obtaining car finance.
Halal Car Finance Options
Generally speaking, the traditional car finance options such as hire purchase agreement and personal contracts are always attached to an APR and this makes them non compliant with Sharia rules.
However, below is an example of how Islamic finance options can adapt the traditional car finance options to make them halal.
Hire Purchase Agreement (Hp)
HP financing means the buyer can spread the cost of the car over fixed monthly payments and the use of a deposit. Below is an example of an Islamic finance HP deal:
Example:
Price: £20,000
Contract Term: 12 months
APR: 6%
Total Cost to buyer: £21,200
Using an Islamic finance agreement, the seller/dealer would add the additional £1,200 to the price of the car. The buyer of the car would then pay £21,200 as fixed payments monthly for the contract term. When all the payments have been made, the buyer owns the car outright.
Personal Contract Purchase (Pcp)
PCP's are a common form of car financing option and act as a loan, with the buyer only paying off the full value of the car at the end of the contract term if they decide to keep the car. If the buyer does not pay off the full value of the car then they do not own the car at the end of the contract. PCP's usually always come with interest payments and are therefore not Sharia compliant.
However, there are sometimes some PCP finance deals available for new cars but these can be expensive and the requirements are often stringent.
Personal Contact Hire (Pch)
As PCH agreements are actually long-term hiring agreements they are normally deemed to be Sharia compliant. As you are simply renting the car from the owner or dealer you are simply paying for the use of the car for a specific duration.
Conclusion
Each contract and hire purchase agreement is different. The onus is on the customer to ensure that they have inspected the terms, and service fees of the agreement before they decide whether the option is Sharia compliant. There are various Islamic car finance options on the market these days, so it is always best to explore these options rather than using the traditional bank or dealer car finance options.
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