Funding For E-commerce Businesses
As e-commerce businesses and platforms continue to increase and develop, one of the main challenges these businesses face is securing financial backing. E-commerce platforms and websites such as Shopify have grown exponentially in the last decade, and this is in part due to the change in consumer behaviour with increasing amounts of money being spent on online shopping. As consumers have flocked online to purchase what they need, especially during the Covid-19 pandemic, the e-commerce market has grown quickly to meet the demand.
In addition to consumer demand, another reason for the growth in e-commerce ventures and transactions is the fact that e-commerce trading is accessible to all. Online businesses are democratised, enabling all entrepreneurs equal access to entry when it comes to selling products and services. However, like traditional businesses, e-commerce enterprises need funding in order to grow. Arguably, the financial world is still trying to catch up with the growth of e-commerce in terms of the funding options available. The finance world is continuing to evolve to ensure that it meets the needs of e-commerce retail businesses that operate via web pages and online sales.
Not having the capital funding and investment available is one of the main reasons that prohibit online ventures from succeeding. With consumers in the United Kingdom spending over £1 billion online every week, e-commerce funding has become a growing market. However, with less hard assets as traditional bricks-and-mortar businesses, e-commerce ventures may find it harder to find and secure the funding they need to expand and meet the needs of the economy.
When To Start Raising Funding
For any business venture, the best time to think about funding and finance is when the business idea is developed. Once you are clear about your business goals and aims, you should work out how much money you will need to achieve those goals. Securing funding not only enhances the chances of success, but also ensures you have the capital to build and execute your business strategy.
The type of funding you opt for depends on what type of business you have, your business needs, whether you want to ensure you keep full ownership, and what the funding is needed for.
Why E-Commerce Businesses Need Funding
You might be wondering whether a business venture that operates online requires funding? After all, many e-commerce businesses may not need the levels of inventory required by traditional businesses. Online ventures also do not have the extensive costs of property rental or asset management, but they do have the technology and software to function well on the internet and provide the best end user experience.
E-commerce funding is essential because it facilitates growth. Capital funding means the business can cover its expenses that can include marketing costs, operational expenses, and costs of operating via online platforms. E-commerce businesses have similar expenses and outlays to other businesses.
Many traditional funding options such as bank loans simply do not meet the needs of digital e-commerce business models and ventures. Online sales mean the logistics of e-commerce businesses are totally different from the needs of more traditional shopping and retail enterprises. E-commerce presents a different type of business opportunity that many people want to capitalise on using their sales skills and the newer forms of funding support e-commerce in a better way than bank loans.
The good news is that modern forms of e-commerce funding are becoming more prevalent. The most successful e-commerce ventures are those that appreciate what kind of funding they need, the financial rules and laws relating to their enterprise, and how best to leverage the funding to scale their business.
Below we will look at 6 of the most popular ways to fund e-commerce businesses.
Crowdfunding
The reason why crowdfunding is a great option for e-commerce businesses is that it follows a modern formula for financing a business. Crowdfunding works by essentially obtaining funding from a crowd. This entails raising awareness of the business, then seeking contributions from various funders (often individuals and members of the public). Crowdfunding platforms like Kickstarter and Gofundme facilitate the receipt and payment of the funding.
In essence, crowdfunding flips the conventional funding model over. Instead of starting with capital funding or a loan from a bank, and then taking the idea to the public. Crowdfunding starts with marketing the idea directly to the public and then raising the capital. For e-commerce enterprises this is especially useful as anyone with a good idea can gain traction on social media and acquire capital from investors.
Bootstrapping
Bootstrappers build their business with very little outside capital and investment. Instead, they self-fund their business idea and retain control of the business. Bootstrapping is a simple and flexible strategy but can lead to financial strains and high levels of stress. Normally, ventures that rely on bootstrapping will rely on personal funds and cash flow from the company to scale the business. A famous example of a successful bootstrapping business is Spanx. However, this funding option is not an option for all e-commerce businesses as it requires owners to have a large capital sum to invest in the business from the outset. Remember, not having enough working capital can be disastrous for sales and growth and can ultimately be detrimental to the health of the business.
Equity Finance
Equity financing is exactly what it says: finance in return for equity in the business. This is a very traditional form of financial investment and is utilised by many startup businesses. Equity financing can be difficult to secure as new businesses do not have the evidential documentation a successful business will have. For online businesses, they may often find that trade is variable and there are no fixed assets or real estate property to secure any financing against. For anyone considering equity finance it is important to evaluate the level of funding that you can raise, and the extent of equity you will be handing over.
Grants
Grants are a great way to fund an e-commerce business, as they are usually non-returnable and act as a great investment into the business without losing control. However, if you want to apply for grants successfully you need to make sure you meet all the relevant criteria for the grant. As expected, grants are fiercely competitive and depend on what kind of business you have. You might find there are more grants available for those types of businesses that support socio-political issues, such as sustainability, green initiatives and charity functions.
The main benefit of grant funding is that you do not need to pay it back, it is capital that is free from interest and costs. Applying for grants is a lengthy and complex process and there is no guarantee of success. It is always best to research fully any grant opportunities and fine tune your business model and documentation before any application. Bear in mind that some grant funding also requires match funding from the business.
Revenue Sharing
Revenue sharing is a fairly new funding model that is particularly popular with e-commerce businesses that operate via websites across different territories (ie United Kingdom, United States, China etc). The way revenue sharing works is that funding is provided, and in return the business offers the financier a share of future revenues. Repayments are tied to the level of revenue to be generated. So, if revenue increases so too the repayments increase, and if the revenue falls the repayments also come down. The reason many e-commerce businesses like the revenue sharing model is that there is no requirement to give shares or equity to the investors and the business owners can retain full control of the venture.
Bank Loans
Bank loans are the traditional form of funding businesses have always used. They facilitate raising capital funding via borrowing. Usually, the loan is repaid via regular repayments that include interest and other fees. The difficulty with this model of funding is that it is prohibitive to those who adhere to Islamic finance and do not want to incur interest charges, and also bank loans are not always accessible for new e-commerce businesses. This means that the terms on offer are not always competitive. For anyone considering a bank loan, you need to make sure you research what the terms and conditions of the loan are and think about what level of debt you are comfortable with.
Whatever funding option you decide to pursue, you need to make sure that the capital raised meets the needs of the e-commerce business and that you do not fully lose control.
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With the financial landscape changing constantly, Muslims are looking out for investments that are profitable and Sharia compliant. With so many Muslim women managing their own finances and the finances of their home, there is an increased demand for halal investments.
Making spiritually aligned investments seems more important than ever in todays society.Whether it is investing in the stock market, the exchange-traded fund, personal savings, having an ISA or looking to invest in real estate, more and more Muslim women are looking for smarter ways to invest.
So, what are the things you need to look out for when considering halal investment? Let's take a look.
Understanding Halal Investments
Halal investments are those financial activities that are compliant with Islamic finance rules and Sharia law. Islamically, financial dealings which are based on interest or speculation are not permitted. This means many Muslims will not invest.
Islamic finance investments are more focused on investments that are ethical and deemed to be socially responsible. That is, they offer some tangible benefit to society and are not exploitative or speculative.
For an investor looking for a halal investment, they need to look out for the following:
- the investment must avoid any form of interest: charging or paying interest is haram in Islam. This means that if you are investing in an industry that includes interest or is deemed to be a haram industry then this is not permitted.
- the investment should avoid any kind of ambiguity: this means that any form of investment in stocks and shares that is akin to gambling is not allowed. There must be clear terms and conditions and transparency in all transactions that relate to any asset or money.
- It is important to avoid haram: this relates to any industry or dealing that is haram.
- social responsibility: it is important to ensure that any investment aligns with your ethical responsibilities under Islam and is socially responsible. To invest in arms production would not be deemed to be halal, nor would investment in the alcohol industry.
Navigating Financial Products That Are Halal
Halal investment can take many different forms. They include the following:
- Islamic banking: banks and other financial institutions often offer services and products that are halal. You can use a Sharia compliant bank account to save your money.
- Islamic mutual funds: these kinds of funds have been vetted to ensure they are Sharia compliant (although you should also make your own enquiries). Islamic mutual funds invest in Sharia compliant industries, markets, and assets. Investors share in the profits generated and also in the losses if they occur.
- Islamic real estate: investments in real estate are becoming more common with the onset of Islamic finance mortgages and funding options.
- Islamic bonds (sukuk): Islamic bonds are the type of financial instruments that are fully compliant with Sharia law. They offer investors ownership in an asset and the profits and revenue are generated by the asset.
- Halal stocks: companies that operate in a halal way offer stocks that can be purchased by investors.
- Exchange-traded funds: you can find halal ETFs on the market if you look carefully. There are many ETF products that invest in a range of halal stocks and other permissible assets.
- Islamic crowdfunding: some platforms are now offering Islamic crowdfunding options and peer lending options from one person to another. If thinking of making an investment on such platforms make sure that they are Sharia compliant.
Empowering Women
There are growing numbers of young professional women who want to invest and manage their money in a Sharia compliant way. For these women investing in halal companies and stocks is not simply about wealth management but also about adherence to the rules of Islam.
The empowerment of women in the financial sector has always been a practice in Islamic societies. The very fact that women often manage the household finances and then have to ensure they have sufficient funds for the charitable payments of zakat, means that women have always been financially literate.
In Islam, mutual consent in financial dealings is one of the central concepts of Islamic finance. This has meant that women have been involved in decisions about payments and finances from the start.
Women And Business In Islam
Historically, Islam has always promoted the independence of women whether that is in the fields of education, trade, and finances. Historical accounts document that Muslim women were engaged in trade and business many centuries ago. For example, the wife of Prophet Muhammad (PBUH) was a very successful businesswoman.
Islam has always had legal protections in place for women to protect and grow their finances. These protections have secured Muslim women's rights in marriage, in inheritance, and in succession.
Halal investing is linked to faith and encourages Muslim women to view their wealth as a blessing from God and one that needs to be shared and stored ethically. In Islam, women and business are not mutually exclusive. In fact, Islamic history teaches us that women have always been active participants in the business world.
Islamically, women are entitled to own, invest and manage their own funds.
Explaining Interest-Free Finance
For anyone looking to manage their finances in a Sharia compliant way, the very first step is to ensure you are not charging or paying any form of interest.
Interest free finance operates without including interest in financial transactions. When it comes to investing, it is important that you stay away from interest and any industry that relies heavily on interest or debt based finance.
Interest is seen as very exploitative and unethical.
Interest free finance operates on the basis that both parties to the transaction share the profit and the risk. The focus is on real economic activity that generates profit, rather than using money to create money via interest.
Educating yourselves on the core concepts of Islamic finance will ensure that any investment activity you take part in will be Sharia compliant.
Define Goals And Objectives
Identify what your financial goals and objectives are. Look for a market that appeals to you and aligns with your personal values. This should also apply to other forms of investment such as your pension. Is your pension being invested in companies that align with your ethical position? Always do your due diligence and research the industries your finances are involved with.
Spread your investments. Diversify your portfolio as this will not only reduce your risk but enable you to do more social good with your money. It is not necessarily always the case that investing in one kind of stock or bond will yield the best results.
Look at halal index funds and examine the market of each fund. How do they operate? Where do they operate? what information do you have about the return you will receive? Is the service being offered Sharia compliant? what practices does the industry use? How do they pay?
If any industry is non-compliant with Sharia rules then stay away from it.
The value of your investment should not be based on speculative activities or interest. This applies to any form of investment and savings accounts.
Choosing The Right Provider For Halal Financial Services
It is essential that you consult with Islamic finance experts and scholars if you are unsure of investing. An educated Islamic finance expert will ensure that your investment choice is Sharia compliant and regulated properly in the UK.
Once you have made the investment you must undertake periodic evaluations. Regularly reviewing your investment portfolio will ensure it continues to align with your ethical and financial goals. Don't assume that an investment will remain Sharia compliant throughout its lifetime. Companies change course depending on the economy so keep an eye on the Sharia compliancy.
Aligning Values With Ethics And Wealth
When it comes to aligning values with ethics and wealth, Muslim women are embracing the principles of Islamic finance and Sharia compliant investment. Whilst Islam is centred around the the 5 pillars (declaration of faith, prayer, charity, fasting, and hajj pilgrimage), Muslims are also expected to follow the Sharia.
Pursuing halal investment and savings not only ensures that you live a Sharia compliant lifestyle, but also ensures that you live a more meaningful and ethical life.
It is essential to educate yourself and gain an understanding of Islamic finance principles. Stay informed about the different financial instruments that are available and assess them for compliance with Islamic principles. Screen investments and work with companies who also align themselves with Islamic finance rules.
The world of Islamic finance based investments is widening year on year, so there are plenty of options available out there. Regularly review your investment portfolio and make any adjustments you need to. Finally, be patient and be ethical.
Qardus do not provide financial or investment advice.
Starting a new business requires an investment of time, energy, commitment, and money. For any small business or startup company, the financial investment is what converts the original concept and elevates into a running business. However, securing the required finance to get your startup off the ground can be difficult, especially when the venture capital market is unpredictable or saturated. Funding is central to ensuring that the business can begin its operations, and it has the cash flow to pay for wages, suppliers, and equipment.
Money can often be one of the main limiting factors that prevent businesses from getting off the ground or launching properly. Many business beginners will not have access to the financial sums needed to build and expand their business. An injection of cash into the business means that it can start earning more quickly, and any profits can be reinvested into the business, thereby facilitating growth and profits.
Startup Businesses
Startup businesses can face many challenges when launching. Money can often be a barrier for new startups that can become overwhelmed with the costs of starting a business from scratch. Businesses that are new also find it difficult to attract investors or equity investments from private investors as they have no track record showing their performance levels.
New startups and small businesses may also find it difficult to raise funds via loans in the traditional financing route. Banks want to have a lot of information to support any application for funding, and many of them are more risk averse when it comes to small businesses and startups. This means that unless these businesses have personal savings to use, they can find it difficult to launch their business.
Sources Of Business Funding
Whilst there are some different options out there for those looking for startup funding, it is important to note that funding is dependent on many different factors. These can include the following:
- The strength of your idea
- The level of market research you have undertaken
- Leadership and their business ethos
- Early traction and users of your business
- Good advisors
Once you have a unique idea with a clear target market, and have considered all the points above and worked to strengthen them, you should be in a position to look for funding sources. Government statistics show that UK startups raised almost £2 billion of funding in 2021.Some common sources of business investment include the following:
- Banks
- Government lending schemes
- Grants
- Equity finance
- Angel investors
- Venture capitalists
- Business Partners
- Friends and family
- Savings
Let's have a look at the above in a little more detail.
BANKS
Commercial lenders have always been one of the more traditional routes to securing funding for businesses. Bank loans are an effective way of securing money and come with repayment terms you are familiar with. However, banks will always require some form of security and this can be prohibitive for new startups and smaller businesses who lack the security banks might require.
Securing financing through banks is far easier for established businesses than it is for new and startup companies, especially in unpredictable economic markets such as the one we have seen since the Covid-19 pandemic. This is one of the main reasons startups tend to look at alternative funding sources for their ideas.
GOVERNMENT LENDING SCHEMES
Government lending schemes are usually run in collaboration with banks and commercial lenders. You can find schemes that offer a percentage of the funding with the banks meeting the remaining funding required. Government lending schemes are a great source of funding as the terms are often far less stringent than those normally associated with commercial banks. The loan amounts for government schemes can vary depending on the type of business so always make sure you read the information carefully before you make an application.
GRANTS
Grants from the United Kingdom government tend not to be repayable but you should always check to see what the terms and conditions state. Grants are a great source of funding for small businesses as they can provide an essential cash injection. However, remember that grants usually require a detailed application that needs supporting information, and you need to be able to provide the information as quickly as accurately as you can. Grants are competitive and fiercely fought over so always make sure your application is the best it can be. You should also check to make sure that the grant does not require you to hand over any shares in your businesses, and what the time frame for using the money is.
EQUITY FINANCE
Equity financing refers to an arrangement whereby an investor invests in your business and in return they are given equity/ shares in the business. If the business makes profits, then these profits are shared in accordance with the equity arrangements, and if the business fails then there is no return of the funds to the shareholders who invested. It sounds simple, and in practice it is a simple give and take relationship. However, it can be difficult to find the right equity investor for your business.
ANGEL INVESTORS
Angel Investors are usually wealthy investors who have the funds to provide to small or startup businesses in return for business equity, or shares. Angel investors tend to use their own net worth in order to fund projects in a private equity type arrangement. Angel investors tend to invest their finances in smaller or startup businesses for minority stakes, rather than investing in large businesses where their financial impact is lessened. They also typically invest their experience and knowledge in the business to enhance its success and are usually involved in multiple ventures at the same time.
VENTURE CAPITALISTS Venture capitalists tend to favour larger businesses with high growth predictions. In return for their investment, they receive an equity stake. Unlike angel investors, venture capitalists do not use their own personal funds, but instead they use an investment fund to finance projects and businesses. Venture capitalists focus their investment within industries such as technology, life sciences, and digital media.
BUSINESS PARTNERS
Having a business partner is a smart idea for any new startup. Not only does it mean that you have a partner to share ideas and concepts with. It also means that you have support when it comes to financing, operating and managing the business. Many business partners have a finance background and provide analysis and support to the business, becoming a trusted advisor. For a successful business partnership, you need to have a mutual vision for the business, commonality, and compatibility.
FRIENDS AND FAMILY
Although this may seem like an easy and obvious funding option, using friends and family as a source of investment can be problematic. Unlike borrowing from a bank, taking money from friends and family does come with a lot of additional stress and pressure. However, if you do have friends and family that believe in your business vision and want to invest this can be a good source of raising money quickly. Of course, with new ways of network funding such as crowdfunding and patreon, there are different ways of using your own networks to secure funds.
SAVINGS
Many new entrepreneurs struggle to secure funding and dip into their own savings. This can be risky as there is no guarantee that your business will succeed and you will recover your savings. Using savings might be one of the easiest ways to finance your business, however you may not have all the funding you actually need. Also, the UK business industry is heavily regulated so it is not simply a case of putting your savings in and being able to take them out when you want. Business laws, regulations and guidelines dictate how business finance operates so make sure you have this knowledge before investing your own savings.
What To Do Before Seeking Funding
These are the steps you need to take before you seek our funding options and sources:
- Business plan - make sure your business plan is robust and refined. It should include a summary, a pitch, forecasts, income and expenditure predictions, business process, scalability, market research and strategic management strategies, and projections.
- Accountant - it is essential that you have a good accountant on board so that your financial planning and business service economics planning is robust and considered. A good accountant will help you throughout your business's growth and can provide you with important information about the valuation of your business, taxes, and financial obligations.
- Credit scores - check your scores and improve them if you need to. In fact you should get all your personal finances in order.
- Consider the range of financing options available to you and narrow down the ones that apply to your business.
- Perfect pitching - prepare your pitch and practice it. Remember, if you don't know your business inside out then it is likely that any potential investor could lose interest. Your pitch does not have to focus on sales or products, but it must be convincing and provide real time information.
- Create a website and start networking and sharing your ideas on various platforms, sharing and gathering data, and building momentum for your idea. Your first customers will probably come from word of mouth or networking so get to work as soon as you can.
Non Fungible Tokens
NFT stands for non-fungible token. Essentially, and explained very basically, NFTs are digital assets that can be traded online. Non-fungible tokens are not interchangeable with any other item and are therefore unique.
Currently, NFTs are taking the collectible and digital world by storm due to their popularity. NFTs enable creators to represent ownership of their very unique assets. The NFT itself is a token of ownership with clear and identifiable ownership trails. This means that there is an indisputable copyright status, and royalty protection.
The uniqueness of NFTs lies in the fact that they cannot be replicated. There can only be one owner at any time and the record of ownership cannot be fabricated as it is secured on the blockchain technology. NFTs have their own unique identifying code and this means they create their own digital scarcity.
As NFTs are unique digitally this means that no two NFTs will be the same and their uniqueness provides for a great financial investment opportunity.
Examples Of Nfts
Some examples of NFTs include the following:
- unique digital artwork
- trainers in a limited edition collection
- digital collectibles such as the Lebron James 'dunking against the Houston Rockets' moment
- internet domain names
- Internet GIFS such as the recent Taco Bell series of GIFS
- In-game items
- Ticketing for events
NFTs have exploded onto the mainstream because big brands and celebrities have started to realise how useful and lucrative they can be. High profile company Adidas recently launched a collaborative NFT partnership with Prada, and even McDonalds have added NFT to their marketing and advertising strategy.
These latest collaborations have made the news and brought NFTs firmly into the mainstream spotlight.
HOW DO NFTs WORK?
In its very simple form, NFTs work on the basis that they are not divisible, interchangeable, or assignable. The Ethereum blockchain technology enables the NFT to be fully traceable and trackable. Information about the NFT is stored securely on blockchain technology and this gives investors peace of mind and reassurance.Similar technology that is used for cryptocurrency investments is used for NFTs to guarantee the uniqueness of the NFT. The blockchain technology is the digital ledger that contains the proof of ownership. This means that it is impossible to create duplicates of frauds. This in turn means the price of NFTs can rise based on their features.
NFTs can include anything from digital files, photography, music, art, and videos. Recently, there have even been tweets from web content that have been made into NFTs.
Although NFTs have been around since 2014, 2021 was a bumper year for the NFT economy as NFT financial transactions and sales increased massively with investors building and diversifying their portfolios.
Difference Between Nft And Cryptocurrency
Although NFTs are built using similar technology to cryptocurrency, they are actually very different from cryptocurrency. NFTs are traded and generated using cryptocurrency.
However, unlike cryptocurrency, NFTs can't be exchanged because no two NFTs can ever be identical. What you are purchasing when you buy an NFT is a unique code that will manifest itself as a unique digital item.
For example, if you have multiple £10 notes in your wallet, these are interchangeable. You can use any one of them to make purchases. These notes are fungible - they are interchangeable. In contrast, consider the NFT sale of Jack Dorsey's first tweet that he sold for $2.9 million. This tweet is original and cannot be interchanged or replicated.
HOW TO MAKE MONEY WITH AN NFT
Many investors treat NFTs as they would a stocks and shares investment. They profit from buying and selling NFTs.
For collectors, NFTs are a great investment as they act as digital assets with proof of ownership that cannot be replicated. Each NFT has a digital signature that makes it impossible for it to be exchanged with like for like. Cryptocurrencies, in contrast, are considered to be fungible assets as they can be interchanged with each other.
For creators, they can create and sell their NFTs on various platforms and websites online that act in a similar way to Etsy or Amazon. These websites hold all the data relating to the NFT securely.
For investors, you can sell or trade NFTs. Of course, as with any investment you will need to know when the best time to sell is and factor in any kind of appreciation or depreciation of your NFT.
For many people, NFTs represent a fun but lucrative investment.
INVESTING IN NFTs - THE FUTURE
Although it is difficult to predict the future of NFTs, they are here to stay and experts predict that they will only increase in value and popularity. If wealthy investors continue to invest the NFT market will grow and move beyond gaming and art realms.
Investors looking for long-term investments that are likely to grow in popularity are drawn to NFTs as they have the potential to increase in value, quickly.For investors the main benefits are that NFTs provide the following:
- Proof of ownership
- Exclusive access
- Certifiable authenticity
- Marketplace efficiencies
- Safe blockchain technology
- Facilitate diversification
From a Sharia point of view, scholars understand that NFTs are still very much in their infancy. Any investor needs to ensure that no Sharia principles relating to assets and Islamic finance are breached. For example, investing in NFTs that operate within haram industries such as gambling, alcohol, or porn would be deemed impermissible under Sharia rules.
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