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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An Islamic crowdfunding platform has launched in the UK, providing Shariah-compliant finance to small- and medium-sized enterprises (SMEs).
Salaam Gateway reported that Qardus, which is an appointed representative of Financial Conduct Authority-regulated ShareIn, provides unsecured loans of up to £100,000 in the form of a commodity murabahah, an Islamic financing structure in which the seller and buyer agree to the cost and mark-up of an asset.
The platform, which is open to both Muslim and non-Muslim investors in the UK and Europe, has a minimum investment of £100 and offers target returns of 10 per cent per annum.
Capital at Risk. Returns are not guaranteed
July 13 2020, read the full article at P2P Finance News: https://www.p2pfinancenews.co.uk/2020/07/13/islamic-p2p-lending-platform-launches-in-the-uk/
Introduction
Islamic microfinance refers to financial transactions that are based on wider Islamic finance principles. These Islamic finance principles themselves are based on the teachings of the Prophet Muhammad (PBUH) and the Quran.
Islamic microfinance provides access to financial services for those who live in low-income households or economies.
The contractual terms of Islamic microfinance arrangements are not interest-based, but instead the terms are Sharia complaint. Islamic microfinance is viewed as a positive tool and concept for facilitating poverty alleviation and financial inclusion.
Research has shown that economies that operate or make available Islamic microfinance widen the market for any Muslim customer looking for structures that do not contravene Sharia rules and want a more ethical basis for their financial dealings.
WHAT IS ISLAMIC FINANCE?
Islam sets out principles that should govern financial transactions, especially commercial financial transactions. One of the main principles of Islamic finance is that the money itself does not earn - what this refers to is interest. Interest, or riba, is not permitted in Islam as money is not seen as an asset that earns in and of itself.Some of the main principles of Islamic finance are as follows:
- No interest (see above)
- Prohibition of involvement in haram industries and products
- Equity in profit and loss sharing
- Ethical and socially responsible investing
- Fairness and transparency
- Avoiding speculation or gambling
WHAT IS ISLAMIC MICROFINANCE?
Any Islamic microfinance product or service in any capital form cannot mirror conventional finance arrangements. Many conventional financial arrangements, although able to provide financial resource, are not Sharia compliant.
Let's examine some of the key features of Islamic microfinance:
- Any Islamic microfinance commodity or service must ensure that there is no element of riba whatsoever. No interest is attached to the debtor, the lender, or the debt.
- In addition, microfinance transactions should always be linked to tangible economic activity. This means there cannot be any financial speculation or uncertainty that is excessive.
- Any product that is bought or sold must be clear and tangible. You cannot trade in or sell something you do not own.
- If involving activities, then these should be socially responsible activities that do not exploit or morally harm others.
What this means for Muslims is that many of them stay away from the financial services on offer. Whilst the structure of conventional finance options may appeal to the masses, Islamic microfinance offers an alternative form of finance.
Key Principles Of Islamic Microfinance
One of the main objectives of Sharia law and Islamic finance is to alleviate poverty and empower people and communities.
Whilst we have looked at some of the key principles above, let's have a look at them in more detail:
- Asset backed finance: Asset backed finance encourages finance options that are backed by real and tangible assets.
- Profit and loss sharing: Islamic finance is focused on profit and loss sharing arrangements. This means that the risk is also shared between the respective parties to the contract and transaction. Common forms of profit and loss sharing arrangements in Islamic finance include mudaraba and musharaka arrangements.
- Social welfare: Promoting social welfare is a central tenet of Islamic finance. Providing and facilitating access to education, healthcare, and essential services is seen as the promotion of social welfare so any form of financial arrangement that enables this to take place is seen favourably in Islam.
- Ethical investing: as is the case with social responsibility, Islamic microfinance heavily favours ethical investments. What this means in principle is that any investments need to add value to others and society. Examples of projects and investments that are deemed to be ethical include community development projects, agricultural, and healthcare projects.
- Interest (riba) avoidance: riba is strictly prohibited in Islam so any form of arrangement where interest is paid or charged is impermissible. Islamic microfinance steers clear of interest-based products (often used by lenders in Western economies which are credit and debt based).
Social Responsibility
One of the main principles of Islamic finance is that finance should serve society. What this means is that financial transactions must be conducted in a socially responsible manner. The foundation and ongoing management of Islamic microfinance products (on paper and in practice) should be equity-based.
The idea underpinning Islamic social responsibility is that there is a balance between social objectives and financial objectives. What this ultimately leads to is more sustainable finance long-term as the scope for exploitation and inequality within transactions is minimised.
In many ways, Islamic microfinance is underpinned by principles of benevolence, morality, unity, freedom, and equilibrium. Muslims believe that they all have a responsibility to society and the environment. Therefore, they must embody this commitment to social responsibility through their words and actions.
In this way, they can contribute to social justice (as prescribed by Islam) and ensure populations across the globe are not adversely impacted.
Types Of Islamic Microfinance
Islamic microfinance is based on the foundations of Sharia law. Sharia rules place great emphasis on transparency, fairness, social responsibility, and ethical behaviour.
Let's have a look at some Islamic microfinance products:
MICROCREDIT
Islamic microcredit is a term used to describe small financial services relating to credit. Microcredit operates within Sharia rules and is designed to ensure that entrepreneurs and small businesses are able to access fair and equitable financing options.
Islamic microcredit does not include any riba and is asset-based finance. Any loan issued is backed by assets or productive ventures.
MICROLEASING
Islamic microleasing (also known as microfinance leasing), enables small businesses and entrepreneurs to lease assets for varying periods of time. The leasing arrangements are compliant with Islamic finance rules.
In Islamic microleasing arrangements, the lessor (lender) will retain ownership of the asset and grants the lessee a right to use the asset for a period of time. The lessee then pays the lessor lease payments for the use of the asset.
MICROINSURANCE
Islamic microinsurance is also known as takaful insurance. This type of insurance does not contravene Islamic finance principles. Takaful is a cooperative arrangement based on shared risk and mutual assistance between the parties.
What this means in real terms is that businesses and individuals are able to access insurance coverage whilst remaining Sharia compliant.
Islamic Microfinance - The Prospects
It is estimated that over 60% of Muslims who live in Muslim countries do not use formal financial service institutions and services. One of the main reasons for this is that many Muslims view conventional finance institutions as incompatible with aspects of Sharia law.
This has led to the emergence of microfinance services and products being developed both inside and outside of Muslim countries and economies.
Muslims are increasingly keen to engage with financial services that comply with Sharia law and the rules of Islamic finance. Since 2006, the Islamic finance market has seen a four-fold increase, and this is likely to continue growing in the future.
What Islamic microfinance represents is the merger of two quickly accelerating industries - Islamic finance and microfinance. Not only does Islamic finance meet the commercial business demands within global economies, but it also provides individuals looking with Sharia compliant funding options.
Unlocking The Potential Of Islamic Microfinance
Any financial transaction that meets Sharia rules is not only good for business, but it also means that transactions are socially and ethically considerate.
Islamic microfinance has the power and potential to operate in a fair, socially responsible and transparent way. What this means for businesses, the entrepreneur, individuals, and communities is that they too can access funding and enhance their ability to access finance and loans.
Providing financial access to poorer or marginalised communities who currently reject conventional, interest-based finance products means greater equity and economic development.
Islamic Microfinance And Poverty Reduction
Islamic microfinance is based on the foundations of equity and social and environmental responsibility.
One of the main advantages of Islamic microfinance is that it contributes to poverty reduction in various ways:
- Enterprise and entrepreneurship - Islamic microfinance supports individuals and businesses from low-income and under-developed communities. It enables these businesses and entrepreneurs to access capital for the ventures and establish sustainable and Sharia compliant livelihoods.
- Financial inclusion - as already mentioned, Islamic microfinance has become an important tool in encouraging and facilitating financial inclusion. Offering financial products that are not only accessible but also Sharia compliant means that marginalised groups can access funding for their start-ups.
- Skills growth - there are many Islamic microfinance organisations that offer training and skill enhancement programmes alongside their financial products and services.
- Community development - with a strong focus on equity and social responsibility, Islamic microfinance is committed to community development. This goes beyond offering financial assistance. Microfinance products can include access to healthcare, education, and a wide range of community benefits.
Islamic Microfinance - The Challenges
One of the main challenges for the Islamic microfinance industry is spreading awareness of the products and services on offer. Despite growing rapidly, this industry is still seen as being in its infancy.
Further advertising and outreach work is required to make sure that Muslims and socially responsible investors are aware of the microfinance options available to them.
The important thing to remember is that Islamic microfinance encourages and develops financial inclusion and freedom. Whilst the impact of Islamic microfinance funding options may vary depending on the regulatory environment, local economic conditions, and institutional capacity, Islamic microfinance is essential if we want to ensure the sustainability of Islamic finance initiatives and alleviate poverty.
CAN MUSLIMS INVEST IN GOLD?
The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) is widely recognised as a global leader of maintaining Islamic finance standards.
The rulings of the AAOIFI are accepted across Islamic markets. the AAOFI has led to many Islamic finance and Sharia-compliant gold products and services including investment options and accounts, EFTs, gold saving plans, and spot contracts.
IS INVESTING IN GOLD HARAM IN ISLAM?
According to the AAOIFI, there are certain standards that should be met when any Muslim considers investing in gold. These include the following:
- Gold should be traded on a hand to hand basis
- Gold can be jointly owned
- Gold ownership can be constructive or physical
- In each case, the gold should be completely allocated (with no ambiguity re ownership)
- Allocation can take place through settlement, certification, confirmation, or receipts.
Under Sharia rules, gold trading is haram if the following criteria are not met:
- the exchange of any metal including silver for silver and gold for gold must ensure that they are of equal weight and worth
- there must be an on the spot cash payment (no future options)
It is also very important to note that there can be no element of interest (riba) in the trade. When it comes to futures and options riba can sometimes occur in the deferment of the delivery or in the payment structure. To ensure riba is avoided, make sure the deal or transaction takes place and completes on the spot
WHEN IS GOLD TRADING NOT HALAL?
It is important to remember that whilst gold trading is deemed to be halal, speculative trading or gambling of any nature is not permissible in Islam.
For example, gold trading that involves futures and options contracts which usually involve elements of speculation could be deemed to be haram.
Under Sharia rules, a key component of compliance when it comes to investment and trading is that the asset should be physically backed. This is easy to achieve with gold as it is a real physical asset.
However, Muslims need to be aware of the Islamic finance rules relating to investment and trading, and the fact that gold is deemed to be a rabawi item.
This means that gold in itself cannot be traded for speculative purposes or future profit. It is halal to use gold as medium of exchange and a form of cash. Also, it is permissible to own gold as jewellery.
HOW CAN I INVEST IN GOLD IN A SHARIA COMPLIANT WAY?
To invest in a Sharia-compliant way you need to make sure that you comply with Islamic finance investment principles. You have to ensure that any investment portfolio is secured and managed in the correct way. Consult knowledgeable experts and ensure you understand Islamic finance rules.
Make sure of the following:
- Use a credible and acceptable form of payment. This could include bank transfer, bankers draft, cash, coin, or Sharia-compliant credit.
- The gold must be physical in the form of jewellery, gold coins, or bars.
- delivery and completion of the transaction and finance should occur on the spot
- Work with reputable agents who have verified transactions and parties and can validate the Sharia compliancy. In the UK and worldwide there are many banks and agents who are certified to work within the Islamic finance market.
- Whether you are a seller or a buyer, make sure you undertake your own due diligence and the terms of any investment are clear before you sign up to deal.
Managing and investing wealth in a Sharia-compliant way is the responsibility of all Muslims. It is imperative that Muslims ensure that as customers, sellers, investors, and buyers they are working towards compliance with Islamic rules and learning information about gold trading.
ARE GOLD CHAINS ALLOWED IN ISLAM?
Muslim men are not permitted to wear gold jewellery or adorn themselves in gold in any form. They are allowed to wear silver jewellery or jewellery made using stones.
Muslim women, however, are permitted to wear gold chains and jewellery.
When it comes to white gold, the ruling is the same. It is not permissible for men to wear white gold. This is due to the fact that white gold has high percentages of gold within it. This also applies to gold plated jewellery or any design or jewellery that contains gold as its main component. For Muslim men, it is best to stay away from gold jewellery.
HADITH RELATING TO GOLD?
One of the well-known hadiths relating to gold in Islam is the one relating to the Prophet Muhammad (PBUH) where he states that:
"Gold for gold, silver for silver.... like for like, equal for equal and hand to hand, then you may sell as you wish..'.
This hadith sets out some guidelines for transacting on gold and silver.
IS IT A GOOD IDEA TO INVEST IN GOLD?
There are many a website and platforms available that can provide you with information relating to investments and trading.
Gold trading is halal in Islam, and with gold prices increasing at high rates in the last few years alone, it is always a good idea to invest in gold. When it comes to the actual investment, there are many different options for Muslims looking to invest in a way that is Sharia-compliant and also yields a good return on investment.
Investing In Gold - Tips
There are various ways you can start to invest in gold today:
- look for reputable companies and agencies to use
- hold bullions or coins (or even shares)
- buy gold jewellery
- research and review EFTs and how they work
- avoid any form of riba
- focus on investing in physical gold
- diversify your investments
- consult Islamic scholars
Make sure you understand and make plans for the storage of any gold you buy. It is difficult and risky to store large amounts of gold (or any asset) at home so seek out storage companies who can help you.
HOW PROFITABLE IS GOLD TRADING AND IS GOLD TRADING HALAL?
Gold trading has always been profitable. Whether you trade in person or online, you need to understand that gold is expensive, and so trading and investment in it comes with its own costs. For example, spot price for gold can range between 5-10% so bear this in mind.
The easiest way to invest in gold is to actually buy it. Another great form of gold investment is EFTs. There are a wide range of Sharia-compliant EFTs on the market in the UK, USA and worldwide.
If you are looking at buying bullion and bars then this can be done via companies that can hold the gold asset for you.
IS LEVERAGE TRADING HALAL?
Leverage trading refers to borrowing funds in order the increase or amplify the potential return on any investment. As with any kind of trading, it is deemed to be halal as long as it conforms to Islamic rules about trading.
When you leverage trade you are borrowing cash to exchange with. This comes with greater risk than not borrowing. Is Islam, leverage trading would be deemed to be haram if interest is charged, or if the dealer of the leverage is using it for speculative activities.
As long as you use a halal broker who understand the Islamic finance rules, then leverage trading can be halal. In recent years the Islamic finance sector has created Sharia-compliant services that offer leverage trading or services similar to it.
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