Choosing the right business funding option
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.
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IS THERE A HALAL INDEX FUND?
Yes, there are many options these days for those looking for halal index funds.
Index funds have long been known as one of the best and easiest ways to invest your money. The increase in the availability of halal index funds, that is funds that comply with Islamic Sharia rules, means that there is an even greater opportunity to maximise your investments without breaching Islamic finance principles.
Halal index funds enable investors to invest in a wider selection of stocks all within one fund.
WHAT ARE INDEX FUNDS?
An index fund is essentially a fund that follows what is known as a benchmark index, for example, Nasdaq 100, FTSE 100, and the S&P 500. Index funds are a portfolio of stocks and bonds.
Index funds are generally regarded as a passive form of investing. What this means is that investors who invest in index funds do not have to actively manage their investments.
The index fund will aim to mirror the index they track, they do not need to be actively and constantly managed.
Exchanged traded funds (ETFs) are those funds that are traded on exchanges and usually ETFs will track a specific index. EFTs offer investors a basket or bundle of assets that can be traded. The result is that the portfolio is diversified and the risk is deemed to be low, especially in times of economic growth.
Index funds are popular with all kinds of investors from angel investors, stock investors, new investors, and those looking for responsible investment options.
Difference Between Mutual Funds And Index Funds
The main difference between mutual funds and index funds is that mutual funds need a great deal more active management by fund managers. These fund managers actively choose the investments and manage the mutual fund and this leads to increased management fees and costs.
Before making any kind of investment in index funds you should make some inquiries about the fund, read online information from the relevant website and try and look into the methodology the fund uses (this includes yield, capitalisation, and price).
HOW DO INDEX FUNDS WORK?
Index funds work by investors investing their money in to an index fund that has been created. The money is then used to invest into the companies that comprise the particular index fund chosen. This means investors are able to diversify their portfolios and invest in companies they want to.
For example, if an investor invests money in the S&P 500. This index fund essentially tracks the performance of 500 of the largest companies in the USA. The S&P 500 is one of the largest and most popular index funds on the market.
Investing in companies via index funds means that investors' money is linked to, and tied up with, the performance of the companies within the fund. Many of these index funds have a very wide range of companies within the fund.
INDEX FUNDS WHAT ARE THE RISKS?
As many of the most popular index funds are diverse, this means they are less risky for investors. The reason the risk is lowered with index funds is that there are usually many companies within the fund, so all the investment is not tied up with the performance of one company.
Index funds are known for offering what is considered to be a broad market exposure for investors, with very low operating costs and risk. Index funds are popular with people who want to use the fund as a pension and plan for retirement.
Index funds are normally managed by a fund manager whose employment is based on ensuring that the fund is managed and tracked properly.
Sharia Principles Relating To Index Funds
The Sharia rules that relate to investment funds are the same rules that apply across all financial transactions. Understanding these halal investing principles is essential before choosing where to put your money.
They include the following:
- There should be no element of interest (riba)
- The investments should be ethical and should enhance communities and society in keeping with the social justice element of Islamic finance
- There should be no element of speculation or gambling (maisir)
- Both parties in the transaction should share the risks and profits
- There should be no transactions involving uncertainty (gharar)
- There must be asset backing - this means that every financial investment and transaction must relate to a tangible asset
- The industries, business, and companies within the fund should not be deemed to be impermissible in Islam
WHAT INDEX FUND IS HALAL?
The aim of halal index funds is to create long term appreciation of the investment funds via a diversified portfolio. Revenue is generated if the portfolio increases in value.
This portfolio is securities and investments are compliant with Islamic finance investment principles as laid down by Sharia laws.
Two of the largest index funds are the HSBC Islamic Global Equity Index Fund (halal) and the Vanguard FTSE 100 Index Fund. In the United States, the Dow Jones Industrial Average is one of the most popular funds to invest in. However, there are other index funds that meet the Sharia principles of halal investment. The numbers in the name often refer to the number of companies included within the index. For example, the FTSE 100 includes the largest 250 companies that are currently listed on the London Stock Exchange.
Before investing, always make sure you have done your due diligence and that the index fund you are investing in has been certified as compliant with Sharia rules.
For Muslims, the main incentive for investing in halal index funds is that they comply with Islamic finance rules and regulations. Any stock or bond within a halal index fund needs to be compliant with Sharia rules relating to investing.
ADVANTAGES OF INVESTING IN HALAL INDEX FUNDS - IS INVESTING IN A FUND HALAL?
One of the main advantages for any individual investing in a halal index fund or product is knowing that you will be investing your money in funds that comply with Sharia principles. Halal index funds also take care to ensure that the money is not invested in industries prohibited by Islamic finance principles (such as the gambling, alcohol, and porn industries).
For investors who want to invest in an ethical way that does not adversely impact society, then halal index funds offer the opportunity to do that. The relevance of halal index funds has grown significantly in recent years with the increase in demand for Sharia compliant and ethical investment options.
There is a great deal of global movement towards more responsible investing and halal index funds meet the criteria for ethical investing.
In the United Kingdom, index funds are regulated by the Financial Conduct Authority.
Considerations For Investors Wanting To Invest In Halal Index Funds
Investment in any kind of fund comes with its own risks. You should always seek to do as much research as possible before you invest.
Some of the key risks relating to halal index funds include:
- Risk of the investment value going down
- Exchange rate risks - if the economy and the markets are volatile then the exchange rates could fluctuate and affect your investment gains
- Tracking risks - whilst index funds will track the index, you should expect to see occasional differences in the gains
- Operational risks - as with any fund, halal index funds could be subject to operational and compliance risks which could affect any profit or return generated
LOOKING FOR THE RIGHT HALAL INDEX FUND - IS THE S&P FUND HALAL?
In addition to the points raised above, if you want to invest in a halal index fund then you should look specifically for:
- Confirmation/documentation that the index fund has been certified as being compliant with Sharia rules
- The scope for diversification - the greater the diversification the lower your overall risk
- Fund fees - check what fees your investment will incur
- Foreign companies - looking at companies abroad is a great way of diversifying your portfolio and finding halal investment funds
- Minimum investment levels - check to see if there is a minimum investment level required for the fund you are interested in. Many halal index funds are accessible and have reasonable charges for every level of investor
- Information - check what information is available on the index funds you are interested in. If you have any questions find an expert who can help you with your queries
As halal index funds grow in popularity across the globe it is important to find the fund that works best for you. Currently, Apple is deemed to be one of the largest holdings in the S&P Shariah Index.
SAVING VERSUS INVESTING IN INDEX FUNDS?
Whilst is it always a good idea to have savings, if you are comfortable with taking small risks and want to diversify your investment portfolio, then halal index funds are the way forward.
If you are risk averse and do not want to deal with any market fluctuations, then it is probably best for you to maximise your savings. However, in the current economy savings are not the best way to use your money. Also, for Muslims who are not permitted to make use of high interest savings accounts, looking into index funds is a good way of earning revenue from the money they have.
Halal index funds are a great way for beginners to invest in the stock market. Index funds enable investors to own a share in a company for relatively low cost.
The company that manages the fund will do all the running around and hard work so you do not have to.
Debt or Equity in Islam?Non-interest debt financing and equity financing have both been permitted in Islam. It is no surprise that there is no explicit or implicit text giving one form of financing preference over the other. Financing is part of business activity which is highly contextual and variable depending where the business is in its lifecycle. Whilst equity financing might be the only reasonable method for a start-up, an established business would generally seek debt-based financing.
It is from the beauty and comprehensive nature of Islam that no such stipulation to adopt a particular form of financing is found. If we were bound to get one type of financing only, it would put businesses into difficulty. Shariah has given us some principles with which we need to adhere to. Debt is discouraged when there is no strategy to service it. Likewise, taking on debt when it is unmanageable and beyond one's capacity to repay is also discouraged. Beyond that, it is an economic and business decision which the business can make considering what is in its best interest.Business ConsiderationsDebt vs Equity Financing – which is best for your business and why? The simple answer is that it depends. The equity versus debt decision relies on a large number of factors such as the current economic climate, the business’ existing capital structure, and the business’ life cycle stage. Some of the key factors to consider are[1]:
- The cost of finance: Debt finance is usually cheaper than equity finance. This is because debt finance is safer from a lender’s point of view. From a conventional perspective, interest has to be paid before dividend. From a Shariah perspective, debt and profit in Shariah compliant debt-based products is paid off first. In the event of liquidation, debt finance is paid off before equity. This makes debt a safer investment than equity and hence debt investors demand a lower rate of return than equity investors. Interest debt is also corporation tax deductible (unlike equity dividends) making it even cheaper to a taxpaying company. Arrangement costs are usually lower on debt finance than equity finance and once again, unlike equity arrangement costs, they are also tax deductible.
- The current capital gearing of the business: Although debt is attractive due to its cheap cost, its disadvantage is that an additional return has to be paid. If too much is borrowed, then the company may not be able to meet interest and principal payments and liquidation may follow. The level of a company’s borrowings is usually measured by the capital gearing ratio (the ratio of debt finance to equity finance) and companies must ensure this does not become too high. Comparisons with other companies in the industry or with the company’s recent history are useful here.
- Security available: Many lenders will require assets to be pledged as security against loans. Good quality assets such as land and buildings provide security for borrowing - intangible assets such as capitalised research and development expenditure usually do not. In the absence of good asset security, further borrowing may not be an option.It is also possible to offer unsecured financing. Unsecured financing is Shariah compliant as long as the other principles of financing are met. To mitigate the credit risk in unsecured financing, a director can give a personal guarantee.
- Business risk: Business risk refers to the volatility of operating profit. Companies with highly volatile operating profit should avoid high levels of borrowing as they may find themselves in a position where operating profit falls and they cannot meet the interest bill. High-risk ventures are normally financed by equity finance, as there is no legal obligation to pay equity dividend.
- Operating gearing: Operating gearing refers to the proportion of a company’s operating costs that are fixed as opposed to variable. The higher the proportion of fixed costs, the higher the operating gearing. Companies with high operating gearing tend to have volatile operating profits. This is because fixed costs remain the same, no matter the volume of sales. Thus, if sales increase, operating profit increases by a larger percentage. But if sales volume falls, operating profit falls by a larger percentage. Generally, it is a high-risk policy to combine high financial gearing with high operating gearing. High operating gearing is common in many service industries where many operating costs are fixed.
- Dilution of earnings per share (EPS): Large issues of equity could lead to the dilution of EPS if profits from new investments are not immediate. This may upset shareholders and lead to falling share prices.
- Voting control: A large issue of shares to new investors could alter the voting control of a business. If the founding owners hold over 50% of the equity, they may be reluctant to sell new shares to outside investors as their voting control at the AGM may be lost. This would make equity financing disliked for the current shareholders and debt would be preferred.
- The current state of equity markets: In a period of falling share prices many companies will be reluctant to sell new shares. They feel the price received will be too low. This will dilute the wealth of the existing owners. Note this does not apply to rights issues where shares are sold to the existing owners of the company.
ConclusionThese are some of the many considerations which businesses need to consider before raising equity or debt financing. This shows that the decision of debt and equity is not something set in stone from a Shariah perspective; as long as the debt-financing and equity financing are Shariah compliant, the business is at liberty to choose what is most favourable for their purpose and objective. From an investor’s perspective, they should ensure that the business is Shariah compliant and that it has passed the Shariah screening criteria. This can be ascertained by the review from a Shariah advisor.
[1]https://www.accaglobal.com/ca/en/student/exam-support-resources/fundamentals-exams-study-resources/f...
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. If ethical or Sharia-compliant funding matters to you, it's worth taking time to explore halal investing options before you commit to a route.
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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