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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WHAT IS STUDENT FINANCE?
Student finance in the United Kingdom is funding that is available for students to access to help cover the cost of their further education. The organisation that is responsible for administering and calculating the extent of the student loan payment is the Student Loans Company.
The Student Loan Company was founded in 1990 and was created to provide students with financial support towards their further education. Currently, student finance can be applied for by students to pay for their university tuition fees and living costs while they are studying.
Every student in the UK is entitled to a loan to cover tuition fees. Tuition fees tend to be decided by the universities and the Student Loan Company will make the payment direct to the educational establishment. Currently, in the UK those studying full time can receive up to £9250 per annum towards tuition fees, and additional funds for living costs known as the maintenance grant.
Repayment Of Student Loans
Student loans need to be repaid in full whether or not the student completes the university course or not. The amount you repay depends on your income and is deducted from your salary in the same way National Insurance and tax are deducted.
You become eligible to repay your student loan (with interest) once your income exceeds a certain threshold. In the UK this threshold is currently around £25,000 per year. Repayments are calculated at 9% on sums over the threshold, and the repayment is subject to interest charges.
WHAT IS MEANT BY HALAL STUDENT FINANCE?
Halal student finance in the UK refers to those financial arrangements that students can access to advance and fund their further education. Any halal student finance or loan needs to be compliant with Islamic finance and Sharia principles relating to money.
Specifically, Islamic student finance means that there should be no interest payable or charged on the loan or fees associated with education. Islamically, interest is considered to be haram and should be avoided at all costs.
The concept of halal student finance is structured to ensure that is adheres to Sharia rules and that the financing of education is compliant with ethical and religious rules. The main principle to be aware of is that the arrangement must not involve any form of interest and the transaction should be non-exploitative and transparent.
For many Muslim students, not having access to halal student finance via the Student Loans Company means they do not pursue their further education goals. The main reason for this is that the current student loan system is based on interest repayments.
Student Loans And Interest
Interest on student loans is an integral part of the system that funds further education. This is generally how student loans operate:
- Student applies for university, is accepted on to the course, and then makes a student loan application.
- There are two main elements to the student loan:
- Tuition fees that cover the cost of the course tuition
- Maintenance loan that is aimed to help with the living costs including rent, and books.
- To be eligible for a student loan you need to be resident in the UK and have been accepted on to a course.
- Repayment of the student loan includes interest and the rate of interest depends on factors such as when you took out the student loan. Repayment only begins post graduation and once you earn over a certain threshold.
- Interest on the loan accrues from when you receive the funds until the full loan is repaid.
In addition to student loans, there are also scholarships and bursaries available for some students. Postgraduates can also apply for student finance but whether they receive it or not depends on their circumstances.
Before considering any form of loan it is important for you to gather all the information relating to the loan and how it impacts you now and in the future. Whilst many see student loans as an investment in the future, there have been concerns raised about the inability of Muslim students to access student finance.
WHY IS IT IMPORTANT FOR MUSLIM STUDENTS TO ACCESS HALAL STUDENT FINANCE?
Muslims want to be able enter and partake in higher education without breaching Sharia rules. Currently, as the UK student loan system is interest-based, this precludes many Muslims from being able to access the funding they need to study further.
Islam prohibits interest and at the moment there is no interest-free funding option for students. There is a need for student finance based on Islamic finance principles that form part of the student loan scheme in the UK.
It's not only the interest element that is a problem for Muslim students. The existing student loan system is subject to change and this could fall into the remit of gharar (uncertainty) in Islam which is discouraged.
Without doubt, a halal payment system for Muslim students will facilitate greater inclusion in the education system.
Islamic Finance And Student Loans
Some key features of a halal student loan include the following:
- interest free loans: it goes without saying that any form of student finance must ensure there is no interest being charged or paid in order for the loan to be deemed halal. Instead, what is expected to happen is that the lending institution or bank charges fees or alternative structures to fund the transaction.
- Ethical: halal student finance cannot be unethical. This goes against the basic Islamic finance principles. Any halal form of finance or funding needs to steer clear of haram industries such as gambling, porn, and alcohol.
- Transparent: for a student loan arrangement to be compliant with Sharia rules, it must be transparent and clear. Both parties in the transaction should fully understand the terms which themselves should be clear and non-ambiguous.
- Risk and profit sharing: a key component of Islamic finance is that there is adequate profit and risk sharing between the parties. The student should not bare all the responsibility and risk in this kind of arrangement.
Consultation On Halal Student Finance
In 2014 the government launched a consultation relating to Islamic finance based student loans. What they found was that of the 20,000 respondents, over 90% stated that there was a demand for Sharia compliant student finance.
In March 2023 the government in the UK (having consulted on lifelong loan entitlement) confirmed that although a Sharia compliant student finance product was not available, it was committed to funding an alternative form of finance for students.
The government discussed several criteria that should be applied in a halal student finance system including:
- repayments should be easy to make
- any alternative system should be operated through the student loans company
- debt and repayment levels should be the same as they are for other students
- the service should be easy to use and transparent
Halal Student Finance And The Takaful System
At the time they were considering halal student finance options, the government concluded that a takaful system would be most appropriate. In Islam takaful refers to Islamic insurance and is based on cooperation and mutuality.
Takaful systems operate without insurance or gharar.
Unfortunately, no halal student finance option ever really emerged. Instead the government focused on other areas of student finance and simply concluded that they would continue to consider halal student loans.
Whilst government controlled and regulated student loans may not be available as yet, there are still halal finance options available. Some financial institutions are offering Sharia compliant loans that could be used for education.
Tips For Students Who Want Halal Student Finance
For students who are looking for halal student finance alternatives, here are some options you can consider:
- Research Islamic finance products and services, including this Sharia-compliant investment guide
- Look into Islamic scholarships
- Speak with Islamic finance advisors
- Speak to your university finance team and ask them for details of hardship funds or grants
- Consider interest-free loans from family
None of the above are ideal for Muslim students but could provide alternative halal funding for further study.
The future of halal student finance is dependent on many factors including the demand, the economic landscape, and the continued growth of Islamic finance. The Islamic finance industry is innovative and dynamic and could partner up with educational establishments in the future.
Increased awareness and education about the need for halal student loans is also something that could potentially speed up the availability of halal loans. Muslim students need to stay informed and alert and always explore all the options available to them before deciding against pursuing further education.
WHAT IS GHARAR?
Islamic finance defines gharar as something that is uncertain, risky, or hazardous. If there is a financial transaction where any of the basic elements of the agreement are unclear, uncertain, or ambiguous then the transaction or activity could be deemed to have an element of gharar.
Using the principles of Sharia law, the reason gharar is prohibited in Islam is that it removes transparency, openness, and certainty in financial transactions and contracts.
Gharar And Islamic Finance
According to Islamic finance principles, which themselves are based on Sharia law, gharar is a fundamental prohibition in Islam as it results in a lack of certainty.
This lack of certainty then increases the level of risk and liability to one or both parties.
Islamic Finance And Ethics
Islamic finance is based on ethical finance. What this means is that whilst Islamic finance and Sharia rules recognise the importance of finance in society, there is a need to ensure that there is intrinsic value and ethical boundaries when parties transact.
The underlying ethical principles in Islamic finance aim to ensure that there is transparency and certainty for the parties involved.
When you understand the ethical nature of Islamic finance you appreciate how it works to protect the parties and ensure there is fairness.
Examples Of Gharar
Some examples of gharar in modern contracts and financial transactions include the following:
- options contracts
- future sales
- selling the unknown
- short selling
- sales of debt
- day trading
Essentially, the sale of anything which is not present or tangible is gharar, and therefore not permissible in Islam.
Similarly, if ownership of an asset or product is uncertain this could also be considered to be gharar.
This is why it is important that you understand the concept of gharar and how it is applied, whether you are dealing with a bank, business, financial institution, web page or individual.
Elements Of Gharar
In order to decide if any financial tranaction or business dealing has an element of gharar you need to assess the level of certainty within the terms of the deal.
Some of the main terms you need to understand include the nature of the transaction, the parties, the language of the contract, the product, or service involved.
Gharar has certain characteristics that you need to be aware of.
- the parties: gharar does not always relate to uncertain or risky terms in the contract. Gharar could also occur in the nature of the parties involved, their relative bargaining power, their openness and the level of risk they take on
- contract terms: language used in the contract must be clear and concise.
- two or more sales in one: this refers to deals that are uncertain with timings. For example, if a seller states they will 'sell this asset for £100 in cash today and £150 next week'. The timings here are uncertain.
- conditional contracts: this refers to conditions in a contract that are unknown and uncertain. For example, if a seller states they will sell the buyer an item if the market improves.
- price : if the price in a contract is not known then this could be deemed to be gharar. You should always be careful where the payment terms are not clear.
- Speculation: if you have agreed terms that are speculative then this is not permitted.
- Subject matter: ie, if there is uncertainty in the subject of the contract.
- Delivery: again, be careful if there are no specified delivery terms or final contract date.
Impact Of Gharar
In Islamic finance, certain types of contract are void. These include contracts that are deemed to be invalid, and contracts that are defective.
Invalid contracts are those where key details are missing, such as the price, the payment terms, and the duration.
Defective contracts are contracts which do not contractually bind the parties correctly.Based on these principles, any contract that includes elements of gharar can be deemed to be both invalid and defective in Islam.
How To Avoid Gharar
Whether you are looking to avoid gharar in your financial dealings or daily life, there are some things you can do to ensure that you are compliant with Sharia rules.
You can ensure that there is certainty in your dealings, fairness and openness, and that you are not misleading anyone else. Any transaction should involve the consent and knowledge of the parties involved.
Gharar And Trade
When it comes to trading or business, one of the main ways to ensure you do not fall into the gharar trap is to ensure that any trading has the consent of both parties.
Any form of trading in risk is not permissible. If it is likely that one party in the transaction is likely to make a significant gain at the cost of the other, then the result is that this is generally forbidden under Sharia law.
Any exchange that could lead to exploitation and injustice should be avoided. Instead, you should aim to ensure that all your dealings are transparent, consensual, and satisfactory to both parties.
The current cost of living crisis in the United Kingdom is affecting everyone. For many households, this is the highest squeeze on their finances that they have experienced. Many people are being forced to take measures in order to stay afloat. The cost of food, goods, and utilities are continuing to rise at an alarming rate, and people are having to make smart financial decisions.
According to recent statistics, up to 18 million households could face fuel poverty by January 2023 due to the ongoing energy crisis. Many of these families will have to decide between heating and eating. Investment bank Citi estimates that the UK consumer price inflation could reach 18% by early 2023. This will not only affect the finances of couples, and families with children, but almost everyone in the country.
This is why it is vital that you make smart financial decisions that could help you ride out this current cost of living crisis.
Let's have a look at some of the ways in which you can make your money go further.
Plan And Budget
One of the best things you can do is prepare a spending and budgeting plan. This will help you identify if you are overspending and examine those areas where you can cut back and save costs.
For example, do you still need to have a full Sky TV package? Can you get a cheaper broadband deal? Do you have any subscriptions that you no longer need or use?
Go through each direct debit and see if you can reduce or remove it. Check what you are paying for your smartphone packages and see if these can be reduced in any way. Ring your providers and ask them if they have any better deals on offer that could lower your costs.
Track all of your expenses and payments. This is the only way that you can successfully budget. Information and knowledge are power so use them to your advantage. Create a spreadsheet or table that lists all your incomings and outgoings, and then have a close look at where your money is going.
Muslims will already be used to the concept of planning and budgeting as they have to reconcile their finances and accounts every year in order to calculate their zakat calculations.
However, it is a good idea to keep a more regular eye on your finances, and remember that any drop in your income and savings may also affect your zakat and sadaqa payments.
Live Within Your Means
This is really important. It sounds so simple, but many people in the UK live beyond their means and this means they will struggle during the recession.
Having debt is not so much of a problem when times are going well. However, if you fail to make your repayments things could go wrong very quickly.
There is a famous Arabic proverb that states 'cut your coat according to your cloth'. Essentially, this encourages us to live within our means and not overstretch ourselves financially.
Islam does not look favorably on those who spend excessively and keep increasing their debt. We should all be looking at how we make use of our resources and expressing empathy for those less fortunate. Managing our finances well is something everyone needs to do, and needs to learn to do better.
Pay Off Debts
It might sound obvious but it is vital that you pay off any debts that you are able to. There are many online debt advice helplines that offer you recommendations and a guideline to help you reduce your debts.
You should prioritize paying off any debt, especially if it is a debt that accrues interest. Interest is not only strictly prohibited in Islam, but is also detrimental on your finances as the interest rates are likely to continue to increase.
If you can, pay off your debts.
Do Not Accrue New Debt
If you are thinking of taking on a new loan or new debt then think twice. Especially if the debt will be accrued due to a purchase that you do not necessarily need.
The same applies to buying things using your credit card. Now is not the time to be accruing more debt that incurs interest.
Start Saving Now
If you can, start saving now. It is never too late to start saving. Good financial management not only means monitoring your spending habits, it also means looking at your savings strategies.
You may need to undertake an evaluation of all your incomings and outgoings to see if there is anything you have left to save. If you do, even if it is a small amount, it is never too late to start saving.
If you do not have an ISA now is a good time to find information about what savings products are out there. For Muslims, there are some halal savings accounts that do not pay interest.
These halal savings accounts offer the same banking services as conventional savings accounts without interest.
Set Savings Goals
Set savings goals for yourself. This could be as little as saving £10 a month, to saving much more.
If you are saving to buy your first home, then you will likely be impacted by the increase in interest rates.
Look for banks and lenders that offer halal mortgages based on Islamic finance principles. Halal mortgages tend not to be as dependent on standard interest rate fluctuations and offer more stable repayment options.
Invest
Many people are scared of investing during a recession or economic crisis, but there are some good investments out there that can generate revenue and income.
Do your research and have a look at what investment opportunities are out there for you.
Investing in the right funds, stocks and bonds can be inflation busting. If you do your research you could find investments that offer a good rate of return. For Muslim investors, there is a range of halal investment options on the market which tend to be more stable than the conventional stocks and shares.
If you want to minimise the risk when it comes to investing, then try not to be too exposed to a limited number of sectors or assets. Diversifying your portfolio via investment is a good way to spread your money with less risk.
Think About Side Hustles
Side hustles have become popular in recent years when it comes to generating additional monthly income. Some low cost side hustles that have been successful in recent years include the following:
- Amazon selling
- Etsy selling
- Selling digital art and services
- Creating a website
- Freelance graphic designing
- Freelance writing
- Blogging and vlogging
- Social media influencing
- Shopify
- Dropshipping
- Creating online courses and offering advice
- Affiliate marketing and advertising services
- Starting a podcast
- Using comparison and cash back websites
These are just some side hustles that require very little financial outlay at the start.
Undertake Due Diligence Before Making Big Financial Purchases And Decisions
If you are thinking of making a big purchase such as a home or a car then make sure you do all the necessary research. Use comparison websites to find the best prices for things like electrical goods and holidays.
When it comes to home purchases, remember the housing market is likely to undergo some change in the coming months.
It might be better to sit tight to see if there is a fall in house prices. You should also look at different funding options such as halal mortgages. These types of mortgages tend not to have fluctuating rates as they are not interest based loans.
Take Your Time - Don'T Be Hasty
This is important. Now is not the time to make rash decisions or rush into big purchases or commit to long-standing and expensive monthly subscriptions.
Whether it is a smartphone or a new streaming service, take your time in deciding whether you definitely want to commit some of your monthly income to it.
WHAT IF YOU ARE SELF-EMPLOYED?
For the self-employed there are some additional concerns during a recession. For a start, whilst you may already be accustomed to fluctuating monthly income, you may see a drop in overall income as your customers feel the pinch and cut back on their spending.
Rising inflation is likely to affect all businesses, irrespective of size and industry.
Now is a good time to look at your personal finances, and check to see that you can:
- meet your mortgage repayments or rental payments
- meet all your essential direct debit payments for things like utilities
- have enough money to cover food and groceries for at least 3 months
- have some savings to fall back on in case your monthly income drops
- cut back on any non-essential items of expenditure
Some Ways You Can Protect Your Money
The Bank of England recently raised the interest rates. When this happens, it is usually an indication that the Bank of England wants people to start saving more and spending less.
Some ways to future-proof your money and savings include the following:
- Pay off as much of your existing debt as you can
- Make changes to your living standards that would bring your costs down
- Check to see if you can consolidate any of your debts
- If you have investments, check up on them and see how they are performing
- Save for a rainy day - even a few pounds a month will soon add up
- Track your spending by separating your wants from your needs
- Limit spending on gifts
- See if you can fix your mortgage if you are currently on a variable rate, there are some deals to be had out there
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