Cashflow Planning for Your Business

When it comes to investment strategies, ethical investing (also known as impact investing) is gaining traction. Some commentators have credited the likes of Greta Thunberg for the increase in demand for impact investment products, but this type of investing has been around for centuries in religious communities and societies.

Impact and ethical investments concentrate on approaches and strategies that facilitate inclusion and integration. As a result, the transaction has a positive impact on the social and economic environment. The investment itself is deemed to be one which benefits the investor and the wider community.

For investors looking to align their ethics and values with their financial output, they want to be sure that their portfolio grows in a sustainable way that supports their role as an ethical consumer and investor. Many mainstream funds do not offer ethical products and services, but the tide is changing fast and there are more companies offering bespoke ethical funds for discerningly ethical investors.The main benefits of ethical/ impact investing include the following:

• The values of companies and investors can be aligned
• Companies committed to social causes can be supported
• There is a feel good factor associated with ethical investments
• For religious communities, ethical investments are compliant with religious rules relating to investing (Sharia rules for Muslims)
• Ethical funds are a real catalyst for change
• The financial outlay does what it says on the label - ethical investment

Socially Responsible Investments

Socially responsible investing is a term associated closely with ethical investing. Socially responsible investment has a social conscience and does not negatively impact society. There are many companies on the market that offer investors the opportunity to invest in funds that provide positive social change and impact.

Of course, for Muslim investors socially responsible ventures have always been on the agenda, even when the opportunities to invest responsibly were not widely available on various platforms. Islamic finance dictates that Muslims should not invest in any project that could be detrimental to individuals or society as a whole. This is part of a much broader Islamic value-based social system. Muslims are instructed to safeguard society, the environment and make ethical choices that do not negatively impact society.

Ethical Investments

The definition of ethical investing is centered on the core concept that it is possible to align your financial goals with your moral and ethical values. Ethical ventures are focused on ensuring that the primary filter when selecting opportunities relating to money is based on ethical principles and considerations. There is a demand for increased transparency when it comes to shares, trusts, stocks, bonds and returns.

Used interchangeably with socially responsible and impact investing, ethical investments require due diligence before the capital is actually spent. Assessing whether a fund is ethical is based on using certain environmental, social, and governance criteria which can help you decide whether your investment is, indeed, ethical and socially responsible.

What ethical investment facilitates is the ability for individuals to allocate their capital with companies and funds that align with their own personal beliefs. One example of this is investors who want to avoid industries deemed to be unethical such as gambling, porn, weapons, and alcohol.

For Muslims, ethical ventures go further and also seek to ensure that the investments are compliant with the principles of Islamic finance and Sharia law.

Islamic Finance And Ethical Investments

Whilst ethical transactions may appear to be a relatively new concept in the West, Islamically, ethical investments have been a central principal of Islamic finance for centuries.

Historically, religion and ethical investing have been aligned. Islamic finance prohibits any financing of industries deemed to be haram.

Socially responsible investing and Islamic finance have seen rapid growth in recent decades, and it is no coincidence that the two go hand in hand. Islamic finance centres on principles of social responsibility and impact. This is achieved through principles of sustainability, positive impact, and strong governance.

More and more investors are joining Muslim investors in looking for ethical funds, and funds that offer green funds, or those that support the environment positively.

In recent years, the growth of ethical investing has been fuelled by religion AND social views. Social trends that have begun to lean towards ethics, environmental impact, and transparency have meant that ethical investments have become more mainstream.

In the 90s there was a move away from funds and ventures in the fuel and coal industries, and industries using animal testing, as these were seen as being harmful to the environment and society as a whole. Moving away from environmentally damaging industries was seen as a way of problem-solving some of the damage caused by the operations of these industries.

Sharia Compliant Investments

Investments that are Sharia compliant focus on socially responsible investing, and are focused on the main Islamic finance principles that prohibit:

1. Riba (interest)
2. Gharar (speculation)
3. Financial transactions in industries deemed to be haram such as the tobacco, alcohol and gambling industries

Environmental, Social, And Governance Considerations

In order to assess whether your portfolio is indeed socially responsible and ethical ,there are certain criteria that you can use. The criteria can broadly be divided under three main categories - environmental, social, and governance.

Investors need to review a broad variety of behaviors to understand if the investment is indeed sustainable, responsible, and socially impactful.

ENVIRONMENTAL

Environmental factors to look out when investing include assessing the impact of the investment on the following:

• Climate
• Pollution
• Waste
• Water stress
• Energy use
• Renewable energy
• Conservation
• Carbon footprint and ecological footprint
• Local economic policies

Environmental criteria will assist investors and companies to ascertain the impact of their ventures on the wider environment. Ethical companies should be aware of the environmental impact of their investments by using the criteria above to ensure that the risks are being identified, assessed, mitigated, and managed.

For example, investing in land development may seem like an ethical project, but what if the development adversely impacts local populations, natural resources, and contamination?

GOVERNANCE

In similar vein, anyone investing with a company will want to ensure that the company they use has a very transparent and accurate governance structure in place. Without strong governance, there is less accountability when it comes to ensuring that the investments you make are socially responsible.

The financial reporting and accounting methods, shareholders involvement, accountability, and financial management must have clarity and be transparent. For Muslims, they will also want to ensure that the investment company does engage in any investment behaviours deemed to be haram under Sharia law and Islamic finance rules, and ensure that haram industries are avoided.

When examining the practices of companies and businesses claiming to have ethical investment services and products, the following criteria should be carefully examined:

• The ethical and moral stance and values of the company
• The diversity within the company, shareholders, and board members
• The voting rights of shareholders and profit sharing arrangements
• Previous governance records
• Tax treatment and financial transparency
• What anti-competition practices are in place
• How the company manages financial and ethical conflicts of interest
• Asset management strategies and choices
• How the company treats its customers and investors

SOCIAL

Social criteria focuses on the business relationships of the investment company/ investment and the social impact.

Socially responsible investing focuses on social values, the environment and good governance. Does the investment company you want to invest in hold similar values to you? How committed are they to ethical values? Do they uphold Islamic finance principles? Does the company donate to charities that align with your charitable focus?

When considering the social criteria, you need to look out for investment and financial impacts on the following:

• Supply chain labour
• Ethical sourcing
• Data and privacy
• Protocols relating to health and safety
• Impact and bonds with local communities and links with them
• Previous investment history and sectors invested in
• How the investment portfolio is socially responsible

Ethical Investing

In order to ensure that the investment you make is ethical, you need to ensure that you do your research and analyze the historical, present, and predicted performance and standards of the investment you are interested in. Of course, there are many companies that offer ethical investment products, but that does not mean investors are absolved of their own personal responsibility to undertake research and ask their own questions.

Investors should:

• Review the mission statement of the investment company
• Check their track record of investments
• Review their ethical values and see if they align with your own
• Check if the company complies with laws and statutes
• Understand how ethical investments and funds operate

Is Ethical Investing Profitable

Ethical investing does not guarantee a profit. However, when it comes to the performance of ethical funds as compared to traditional investment funds, there does not appear any significant difference. In fact, ethical investments can sometimes outperform traditional investment funds.

The whole point of ethical investing is that you can invest your money in a way that yields positive results on society and also makes a profit. According to an article in the Guardian (December, 2021), in the United Kingdom alone, the annual spending on ethical services and products has exceeded £100 billion [1]. With the onset of the global pandemic and climate change, people are looking for ethical investments and industries far more than ever before.

The Future Of Investing

We have entered an era when socially responsible investing is increasingly in demand. The increase does not only relate to ethics and morals, but is also centered on principles of sustainability, investor goal-setting, values, protection of the natural environment, whilst still making money.

Gone are the days when investing in the stock market was solely for the purpose of generating income, with no thought for the impact of the investment. Modern ethical investors are keen to ensure their investments are transparent, socially responsible and with solid governance structures in place. Sustainable long term results are seen as aligning with the much broader objectives and principles within Islamic finance and the wider society.

For too long, investments have focused on profit margins over values. Ethical investing means that profits can still be prioritized, but they ranked alongside ethics and values and do not lead to the social exclusion of marginalized groups or countries.

Tips To Invest Ethically

Investing ethically is about more than making sure your investment appears to be ethical. It is focused on investors learning about what it is they are investing in, the social and environmental impact, and holding investment companies to account.

The following tips will help you avoid investments that do not align with your personal values and goals:

• Assess and identify your values and principles
• Learn about ethical investments and how they operate
• Build your investment portfolio carefully with sustainability and social responsibility in mind
• If you have ISAs or pensions review where they are invested
• Check your investment strategy - do you want to focus on start-ups or existing ethical investment companies?
• Make sure you diversify your portfolio across regions and sectors
• Planning your investment in advance

Sources Used In This Report

[1] UK annual spending on ethical products surpasses £100bn for first time [The Guardian, Dec. 2021] [https://www.theguardian.com/money/2021/dec/31/uk-annual-spending-on-ethical-products-surpasses-100bn...]

In recent decades the landscape and number of small and medium-sized (SMEs) businesses has seen a huge transformation. Many of these businesses are formed and led by Muslim entrepreneurs such as Shahzad Younas (Muzmatch), and Ufuk Secgin (Halalbooking.com). With the growth of Muslim entrepreneurs comes an increase in demand for Islamic finance based lending solutions and strategies.

SMEs dominate the world business landscape. They account for approximately 60% of private sector employment. It therefore makes sense that SMEs will require funding options in order to sustain and succeed as a business. With close to 60% of SMEs failing in the first few years, ensuring they have access to adequate funding is critical.

SME lending has historically been centred on the traditional models of funding that are interest based. However, there has recently been a move towards SME lending based on Islamic finance principles.

In the UK, SMEs are considered to be firms that employ less than 250 employees. UK SMEs play a significant role in the UK economy, and the government is keen to ensure that they are sustainable and successful.

SURGE OF SMEs

SMEs account for a significant portion of the world economy. They not only contribute to employment and job creation, they also play a leading role in sustainability and community impact. In the UK a staggering 99.2% of the business population comprises of SMEs.

SMEs are considered to be major employers and they drive local economy growth.

Recent statistics found that the total value of loans to SMEs in the UK reached a whopping £65.1 billion in 2022. This was an increase of over 10% on the previous year and was the official highest on record.

New business lending in the UK totals in the region of £259 million. Demand from SMEs for inclusive and diverse lending options continues to grow.

SMEs AND SOCIAL IMPACT

SMEs play a critical role in society and our economy. Not only do they facilitate and generate employment, they also increase the flow of money from individuals to industries and through society.

At the beginning of 2023 there were estimated to be 5.5 million SMEs in the UK, an increase of 0.8% over the previous year. The professional, scientific, and technical industries accounted for 14% of all SMEs while another 10% are in the retail, trade, and wholesale industry.

Beyond contributing to the economy, SMEs can impact different areas of society. They encompass social development, community wellbeing, alleviating local poverty, job creation, innovation, and reducing income inequality.

SMEs also tend to be more forthcoming in embracing sustainable and ethical practices. They foster financial inclusion by providing local opportunities for local people.

WHY SMEs ARE THRIVING

There are 1 million SMEs in London and over 852,000 in the South East. These SMEs account for 34% of the UK business population. SMEs account for 60% of the employment in the private sector within the UK. They also account for over 50% of the employment in the UK.

As SMEs have grown, so has the need to provide lending that meets their particular demands. Many SMEs do not have the stellar trading history and records of large business.

SMEs therefore need an innovative approach when it comes to lending and funding.

SMEs can come with limited credit history and collateral but bags of entrepreneurial dynamism and innovation.

Distinct from larger businesses, SMEs have unique considerations relating to scale, financials, structure and characteristics. They may have limited access to capital markets, and therefore need tailored and bespoke financial solutions. A one size approach to lending does not meet the needs of SMEs that provide a range of services in the economy.

This is where Islamic finance really comes forth as a viable option for SMEs.

Sme Lending

SME's often demonstrate adaptability and resilience when faced with economic fluctuations, challenges and issues. SMEs are well placed to weather economic downturns and maintaining local communities through change. Lending to SMEs in the UK amounted to £4.8 billion in the second quarter of 2023.

In 2022 36% of SMEs used external funding and finance options. Over 69% of SMEs have stated that they turned to lending options due to cash flow related issued.

For SMEs, obtaining favourable funding options is not as easy as it is for big companies. Perhaps this is the reason more and more SMEs are turning to Islamic finance services.

Islamic finance is a great option of raising funds for SMEs for many different reasons.

For Muslim SMEs that want to avoid interest and want to be Sharia compliant, Islamic finance provides funding options not available in the wider banking sector. Islamic finance is able to adapt to the requirements of Muslim SMEs ensuring compliance and inclusion.

It is also worth mentioning that Islamic finance is based on a risk and profit sharing arrangement. This means that the funder and the SME share the profits AND the risks.

For SMEs, this is a huge benefit as it creates a sense of partnership with support for the new SMEs on the market. SME borrowing has a huge impact on their operations and customer base growth, so it is essential that the SME lending market continues to diversify and educate itself on the needs of SMEs.

Islamic finance is asset backed finance. What this means for the SME is that the financing is linked to tangible assets. In the long term, this is a more sustainable and stable form of financing for them.

Diversity In Business

The great thing about SMEs that often goes unnoticed is how impactful they are when it comes to inclusion and diversity.

In 2020, 16% of SMEs were led by women. Almost 24% of SMEs were equally led by men and women.

Workplace diversity is essential for SMEs as they often operate within diverse local environments. With Millennials currently making up 50% of the UK's workforce (and Gen Z accounting for 27% by 2025), businesses lacking diversity are missing out.

When it comes to investment for the future and the business operations of the SME, they need to ensure they recruit and retrain properly.

Empowerment Through Enterprise

SMEs are known to encourage empowerment through enterprise. This should be done at every stage of the SME process from project initiations, implementations, cost analysis, research, and education.

The result is that SMEs can ensure that they can recognise and eliminate barriers to growth. Enterprise enables SMEs to plan and prepare, ensuring they have the right insight into how to fund their operations and continue to succeed.

For Muslim entrepreneurs there are additional considerations relating to compliance with Islamic finance rules when partaking in financial services and considering lending options.

Why should Muslim SMEs focus on Islamic finance lending:

• Adherence to Islamic rules relating to financial transactions
• Interest free finance options
• Asset backed financing
• Profit and risk sharing
• Flexible finance structures and services
• Financial inclusion without compromising ethics and religious principles
• Community impact
• Flexible payment options
• Lending is not connected to an industry, product or service deemed impermissible by Islam (ie alcohol, gambling, porn)

Faith In Business

Those SMEs that are looking for ethical and sustainable models of finance and lending can find answers in Islamic finance.

Risk sharing, loss sharing, ethical considerations and non-exploitative practices all underpin Islamic finance and support SMEs in a way that traditional financial service cannot.

If your business is to grow, you need to invest in it. Whether the business is a start up, just getting going, or an established firm looking to expand, it needs cash to pay for recruitment, infrastructure, marketing, stock or whatever it is that you need for growth.

Choosing the way to fund your business growth can make a huge difference to your firm's future. While raising finance has one objective - to give you more working capital to invest in growth - the method you choose can have significant implications.

There are different routes for raising this finance. You can put money into the business yourself, take out a bank loan, receive capital from an external investor or take one of several other options. Factors that influence your choice include why you want the finance, the amount involved, your attitude to risk and business ownership, the assets available and your plan for repaying the funds.

How much and for how long

Before entering into a funding arrangement, it's important to be very clear on how much money the business needs and the plan for repaying it. You're investing in future growth, meaning potentially more sales and more profit, but how long will it take for these to come through? Preparing a detailed budget and cashflow gives you clearer visibility of how long it will be before you can repay. While you can't predict the outcome of your business growth activities, you can, using some reasonable assumptions, form a good idea of what's likely to happen.

Armed with this information, you're now in a better position to choose the right funding option for your business.

Debt finance

Raising money for your business can involve borrowing money from your family, a bank or other financial institution. Borrowing, or debt finance, can take the form of a loan, a credit card, invoice finance or some alternative mechanism, such as peer-to-peer borrowing. You're committing to make repayments over a period of time, usually paying interest on the amount borrowed.

Debt finance is either secured or unsecured. A secured debt is where the amount borrowed is linked with an asset, such as a building, and the lender has rights over that asset should you default on making the agreed repayments. You're giving the lender some security that they'll get their money back should your business become unable to repay.
An unsecured debt is not linked to an asset, making it harder for the lender to recover their money. As a result, the interest payments on an unsecured arrangement are often higher and the amount you can borrow is lower. Many financial institutions ask that a director signs a personal guarantee, making them personally responsible for ensuring that the debt is settled.

One risk of debt finance is that the business can become trapped in a debt cycle. You're continually borrowing and paying interest, which eats away at profits. Debt finance can be hugely useful, but its use should be planned and managed.

Equity finance

Equity finance means exchanging part of your business in return for a cash investment. This can be a popular approach for a startup company, particularly where high growth is anticipated, but it needs substantial investment to get going. Venture capitalists and angel investors are always looking out for investment opportunities like this - a business they can buy into that will give them a high return, years in the future.

Because equity capital means giving up ownership of part of your business, it can also mean handing over an element of control. The extent of this should be agreed in advance, in order to set clear expectations. Some investors are comfortable with leaving the founder to manage the business while others want some input into strategic decisions. This can be useful where the investment comes from someone with solid commercial knowledge and experience that they are able to share. Some angel investors want to provide mentorship as part of their investment.

Business angels and others willing to make an investment in equity will want some assurance as to how they will get their money back, and more besides. This could be in the form of dividends or as proceeds from the sale of the business.

The benefits of equity investments include access to larger sums of capital, and potentially, access to the expertise of their investor and their network of contacts. The downside can be loss of total control.

Asset finance

Your choice of funding is broader when your business has assets, such as property, equipment or non-tangible items such as intellectual property. An asset has intrinsic value and this value can be released by taking out finance that's secured on the asset. An example of this is a sale and leaseback arrangement, where the business effectively sells the asset, say a major piece of equipment, and then leases it back from the new owner. This ensures that you can still use the asset, but you also get a lump sum payment from the sale.

A related approach to raising money is invoice finance, also known as invoice factoring. This is often used to improve cash flow in a business that raises invoices on credit terms. The company gets paid almost as soon as it's raised an invoice, even though the customer may take 30 days or even longer to settle the bill. As with most such asset finance arrangements, the interest rate on the money borrowed will affect its cost and the impact on the bottom line.

Business finance can also be raised against the value of an asset in the possession of the business owner, typically a private property.

Crowdfunding finance

The sharing of the risks and rewards of doing business has been at the heart of commercial funding for hundreds of years. That's the principle behind the stock market. Today, crowdfunding is a popular solution to the problem of finding investment for your business growth plans. It comes in various forms, allowing you to raise either debt or equity finance. There are a number of crowdfunding platforms online, each of which offers a different approach to both risk and reward for their members.

The Qardus option for business funding

We provide finance to small and medium-sized enterprises with growth potential that the business owners want to unlock. The funding available is from £50k to £200k with terms of between 6 and 36 months.

Our funding process is rooted in Islamic community principles and is certified as Sharia-compliant. As a result, we don't charge interest and 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 an attractive option for Muslim business owners, but we also provide funding to business owners outside the Muslim community.

We offer fast, flexible and affordable business growth funding that's firmly grounded in ethical principles.