Introduction to Small Business Funding
The success of your business depends on three factors - your product, your marketing and your funding. Most businesses fail not because of their product or their marketing, but because of cash flow problems. It's poor funding that brings them down.As an entrepreneur and business owner, it's easier to get excited about your products and their potential, rather than about your finances. But without secure financial foundations, that excitement can soon turn to frustration.Cash will flow into your business as you sell. But in order to sell you first need money to invest in stock, people and premises. Whether yours is a startup company or you're looking to expand, you need funds to invest in advance of starting to see sales coming in.There are many different forms of business funding. Here are some of those most commonly used by business owners.
Your own money
Many small businesses rely on the founder or owner providing at least some of the capital. There's always an element of risk in starting or growing your business and by funding it yourself, you're not accountable to anyone else. This does mean, however, that if the business doesn't grow as you hope, you risk losing some or all of the money you've invested.Using your own money allows you to be in full control of how you run the business. However, you could be missing out on the advice and guidance that's often available when you're borrowing from someone else.If you're starting a new business, or expanding your current business into a new market, you should anticipate costs being higher than you expect and allow a generous contingency to cover the unexpected. Small businesses don't grow without some mistakes being made, and these cost money. In the longer term, you learn from these mistakes, and they help you make better decisions in the future. However, if you're working on a very tight budget, these costs could seriously hold you back.
Friends and family
You may know people who are open to investing in your business. Some may be willing to give you a loan, quite possibly on generous terms such as with low or no interest and flexible repayment terms. Others may want equity in return for their money - they effectively become co-owners of the business, although probably only owning a small slice.It's for you to determine whether friends and family money is appropriate. It can be very convenient, and flexible, but at the same time you need to be aware of how financial arrangements can affect your relationships with people close to you. If all goes well, there's unlikely to be a problem. But if the business struggles, they may become concerned or even demand some of the investment back.When borrowing from friends and family, it's a good idea to draw up a document that will help to set everyone's expectations, both for how much involvement they will have in running the business, and how and when they will be repaid. They should be made fully aware of the risks involved when putting money into a new venture.
Grants
A grant is money that does not usually need to be repaid. There are various local and national grant schemes available to businesses, usually linked to startups, growth or innovation. They can range in size from just a few hundred pounds to many thousands, even millions.While grants can be hugely beneficial to entrepreneurs, they can also be time-consuming to apply for and sometimes come with quite stringent conditions. Many grants are based on match funding, meaning they won't cover the full cost of a specific project - you are expected to raise some of the funds from elsewhere.
Secured loan
A secured loan is where you borrow from a bank or other institution and if you fail to make repayments the lender has rights over an asset that you own, such as your home or business property. Because the loan is secured on an asset the lender has confidence they will get some or all of their money back, should you run into financial problems.It can take a few weeks to set up a secured loan because legal documents must be drawn up and signed off. The advantage of such a loan is that because it's secured, you may get more favourable terms, such as lower interest charges or a longer repayment term. The downside is that if you fail to keep up with repayments, your property is at risk. Most lenders aren't in a hurry to sell your asset, as they'd rather you found ways to keep up your repayments. However, they have that option if they need it.Applying for a loan will usually require you to provide considerable information about the financial position of your business, along with projections about future income and cash flow.
Unsecured loans
An unsecured loan is where you borrow without providing an asset as security. However, most banks and other financial institutions do ask for a director's guarantee or equivalent. This is where the director agrees to take personal responsibility for repaying the loan, should the business be unable to do so.Because it's not linked to an asset, an unsecured loan can be set up more quickly. However, for the same reason the amount you can borrow is likely to be lower, and the terms less favourable.These loans can come in various forms, including business credit cards, which are effectively an indefinite loan where you choose how much you want to borrow and repay on a monthly basis, subject to certain limits.
Venture capital and angel investors
Venture capitalists and angel investors are individuals or groups seeking to put money into businesses with growth potential. Venture capitalists are investing funds on behalf of a third-party and as such, they are more risk averse. They're looking for evidence that the business has a promising future. An angel investor, or business angel, is a high-net-worth individual who is often more open to getting involved with a startup and will take a bigger risk.The money they give you is not a loan. They are effectively buying part of the business - they have a stake in the equity of your business, meaning they become co-owners. This can have some implications for the amount of control that you have over how you run the business, but can be beneficial, giving you a source of advice and support, and it can provide a strong incentive for you to be more successful.Both VCs and angel investors will make a careful assessment of your business and its potential, and they know that by investing they are taking a risk. At some point they will want to be repaid - often when the business is sold.
Crowdfunding and peer-to-peer finance
The internet has made it much easier to connect people who want to invest, often small amounts, with businesses looking to raise working capital - the cash they need to operate and grow.Crowdfunding is where a business wants to raise money to launch a specific product. The business can be either a startup or an established firm. It launches a crowdfunding appeal to people likely to be interested in the product. The funders typically don't have a right to be repaid if the business or product fails, but if it all goes well, they get access to the product on preferential terms. Two of the most well-known crowdfunding platforms are Indiegogo and Kickstarter.Peer-to-peer finance matches people and businesses with money to lend with others looking to borrow. Top peer-to-peer sites include Zopa and Funding Circle.Any business looking to raise money through crowdfunding or peer-to-peer systems is usually required to undergo credit checks and other financial assessments, to ensure the risk to investors is minimised.
Finding the right way to fund your business
Finding the right way to fund the plans for your small business depends on many different factors, including how much you need to raise, when and how you'll be able to repay it, and your attitude towards giving up some ownership or control of the business. Potential lenders or investors will be interested in your business history, your credit rating and your growth potential. Each will have different attitudes to risk.
Small business funding with Qardus
We provide funds to small businesses with a proven track record that are looking to grow. Our finance is ethical and community based, providing funding from £50k to £200k with terms of between six and thirty-six months. Our funding process follows Islamic principles, meaning we don't charge interest and we don't work with industries considered harmful to society, such as alcohol, tobacco and gambling. The funding is Sharia-compliant, making it an attractive option for Muslim business owners, but we also fund others outside the Muslim community.We offer fast, flexible and affordable unsecured finance, firmly grounded in ethical principles.
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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.
In the last few decades, the halal travel industry has seen a huge increase in demand. The intersection of halal travel and the Islamic finance industry has led to a huge market catering to the needs of Muslim travellers looking for travel options that are halal. This synergy between the two industries reflects the growing need for Islamically compliant travel options. Islamic finance is offering the halal travel industry with Sharia compliant finance options in order to widen the scope of halal travel products and services.
Whether you are travelling solo, as a family with children, for a meeting or conference, the demand for halal accommodation and halal travel is growing. As the demand grows so too does the availability of halal products and services on the market.
Halal Travel
It may seem like a growing trend, but the halal travel industry is here to stay. With millions of Muslims spread across the globe, and with higher levels of disposable income earmarked for travel, the halal travel industry is booming.
The halal travel industry includes a huge range of offerings and services. These services are designed to cater to the needs of discernible Muslims who want to ensure they are compliant with the requirements of their faith, but still able to travel and see the world.
It may seem to be a niche market, but the fact that the demand currently outstrips the supply in many countries shows that this trend is likely to grow. The demand is driven by a Muslim population that places value on authentic experiences and Sharia compliancy.
WHY DO WE NEED HALAL TRAVEL OPTIONS?
Halal travel is important for many different reasons. For Muslims who want to travel without breaching Islamic rules, halal travel offers the option of travel that aligns with personal beliefs.
However, the importance of halal travel goes beyond religious and personal preferences. It encompasses cultural, economic and social dimensions.
Halal travel helps to diversify the travel industry and create respectful and inclusive tourism experiences for Muslims. Not only that, but halal travel goes a long way in contributing to the cultural understanding, economic development, and ethical sustainability of areas in the world that are under-exposed and underprivileged.
The more we invest in areas that are suitable for halal travel the more inclusive we make the world. There are many issues facing different countries in the world, so opening them up to travel and Muslims travellers can boost the economy in a way that makes them a stakeholder in the economy and travel market.
Many Muslims want their money to be spent in countries that align with their personal values and goals. For example, Muslims would probably not seek to travel to countries with precarious political positions such as Israel.
There is a lot of information online that you can use to research travel options. More Halal Travel and Trade Fair conferences are popping up to help you make more ethical Sharia compliant decisions.
Family Friendly Holidays
The main aspect of halal holidays is that they should be Sharia compliant. However, halal holidays are also all about having a family friendly holiday. Most halal resorts cater to families and promote family activities.
This creates a welcoming environment for Muslim families looking to enjoy their break. Halal travel encourages diversity when it comes to travel and tourism. Exploring Islamic history and culture is a key part of halal travel and is increasing in popularity as the Muslim population continues to grow globally.
The increased demand for halal travel also contributes to global connectivity. It encourages and fosters relationships between regions, leaders and countries all actively catering to Muslims.
This interconnectedness is important in bringing unity to Muslims and ensuring that their needs are catered to. It is important to mention that halal travel also facilitates sustainable and ethical tourism. For example, Muslims are increasingly conscious of their environmental impact and they are encouraged to prioritise sustainability and ethical living in all aspects of their lives, including travel.
Principles Of Halal Travel
The key components of halal travel include the following:
- Halal package deals: travel agencies who offer halal travel must ensure that the package itself is halal. This starts at examining the way the company operates, so it must avoid any form of interest and ensure that the package is linked to travel that does not contravene any Sharia rules and adhere to the Islamic lifestyle.
- Accommodation: halal hotels are top priority when it comes to halal travel. Hotels and resorts should be able to provide facilities that permit and promote prayer and ablution. In addition, halal hotels offer segregated swimming pools and saunas and fully halal dining options. We would not expect to see any alcohol or pork in halal hotels.
- Itineraries: some halal travel operators go further and offer trips that offer Islamic and spiritual enlightenment.
- Muslim-friendly destination: of course, when looking for a halal holiday you would want to visit somewhere that is either in a Muslim country or is Muslim friendly.
- Islamic travel insurance: takaful, also known as Islamic insurance, is becoming more popular in the halal travel industry sector. It offers customers the option of obtaining insurance coverage that is Sharia compliant.
- Look for destinations that are not based on exploitation or unfair wage labour practices.
- When approaching halal travel companies, look at their leadership, their governance, the service they offer, the kinds of project they are involved in, and their Sharia compliancy.
- Don't be scared to ask questions of any halal travel company such as who do you bank with? What are your principles and morals and how do they align with Islam? Do they trips offer private spaces for women? What is their governance and decision making process and where do they feel success lies? Remember, our due diligence should include information on how the company runs and if it is ethical so feel free to have those conversations with any company marketing halal travel options.
There are already so many halal travel options and available in many a diverse region including Turkey, Indonesia, The Middle East, Malaysia, Egypt, Pakistan, and Bosnia. You will also find many a dedicated internet forum and platform relating to halal travel if you need more knowledge from a like minded community. Countries like Spain and India that have great Islamic history and heritage are also good areas to explore.
As the halal travel market continues to expand, so too does the list of options.
Islamic Finance And Halal Travel
Islamic finance is playing a large role in the growth of the halal travel industry. If the Islamic finance market had not seen such growth in recent years, then the halal travel industry would not have been boosted. Islamic finance provides the halal travel industry with access to Sharia compliant business and finance options.
The components of Islamic finance play a key role in shaping and supporting the halal travel industry through funding. This is done not only by influencing the way financial transactions are dealt with, but also by how to manage the economic landscape to remain Sharia compliant.Providing access to Sharia compliant finance means the Islamic finance industry can support halal travel companies.
Providing critical cash and capital ensures the halal travel industry can continue to grow. Not only is this good for international trade and partnerships, but it means Muslims can travel knowing they are not breaching the terms of their faith. Knowledge is important.
The growth in the market also means that there are opportunities for investors to indulge in socially responsible and ethical investments in the tourism and hospitality sectors. The halal travel industry has encouraged those with entrepreneurship to expand their horizons and widen the offerings currently on the market.
Halal travel continues to go through an evolution where the interplay of human beings wanting Sharia compliant travel converges with the travel industry to create the perfect package for Muslims. The halal travel sector relies on building relationships across the globe, and ensuring each product on the halal travel market is compliant and enjoyable. After all, many of us travel to a different area in order to explore and relax.
Halal travel isn't only about travel. It's about ensuring that there is attention to the holistic needs of travellers. This includes spiritual fulfilment, access to prayer, compliance with rules about segregation, assurance of halal certified products, and having some cultural resonance with the area visited.
Islamic finance has historically played a significant role in financial inclusion in countries where Islam is a major religion, but it has not been accessible to Muslims in the West until very recently. The growth of Islamic finance has catapulted financial inclusion in previously overlooked groups and has ensured that businesses operating under Islamic principles have opportunities to access funding options and scale their growth.
The foundations of Islamic finance that rest on the principles of anti-usury and no interest have traditionally seemed to be at odds with the concept of successful business and entrepreneurship. After all, usury - leveraging interest rates – is a key component of traditional business growth. However, when it comes to Islamic finance one of the central foundations is that money should not make money, hence receiving or paying interest is not permissible.
In recent years the financial sector has realised the potential of Muslim entrepreneurship and investment, and has offered more inclusive Sharia-compliant financial services. The Islamic finance sector is growing up to 25%[1] each year, and this shows the demand is there for Sharia-compliant finance and banking.
Islamic Finance Principles
What are the main Islamic finance principles that impact on businesses? Islamic finance includes certain prohibitions, rules, and restrictions:
- Gambling (maisir): any form of gambling or speculation is prohibited.
- Contractual ambiguity (gharar): contracts with too many uncertainties or risks are considered gharar.
- Payment and receipt of interest (riba) is not permissible.
- Endowment (Waqf): this refers to a philanthropic actions where the benefit serves specific beneficiaries.
- Interest free loan (qard) where there is no interest payable by the borrower on the loan.
- Insurance (takafuI) refers to a common pool or fund where monies are redistributed to members as and when the need arises.
Combined with the principle of charity (zakah) these Islamic finance principles are centred on inclusion and social solidarity. Promoting socio-economic inclusion, benevolence, and growth via the redistribution of wealth is one of the central concepts of any Islamic finance system.
Islamic Financing Arrangements
Examining the Islamic finance principles above, it is easy to wonder how financial institutions that offer finance based on Islamic Sharia principles actually make money. The answer is that the different types of financial vehicles enable financiers to make money through various financing arrangements. These arrangements facilitate profit sharing and risk management [2].The most common Islamic Financing arrangements include:
- Murabaha: this refers to an arrangement based on profit and loss sharing where both financier and businesses share in the profits and losses. This principle is applied in mortgage transactions where the bank would typically buy the property and resell it to the customer for a price that includes a profit margin.
- Musharakah: this is a joint venture arrangement where both parties contribute capital and agree on the share of profits.
- Ijarah relates to leasehold arrangements whereby the lessor leases the property to a lessee in return for rental payments.
Financial organisations that offer risk-sharing financial solutions, and interest-free banking help to achieve financial inclusion. As you can see from the principles mentioned above, the structure of the arrangement means the bank can make their money by charging rent, sharing profits, or agreeing on a price above market value.
What is Financial Inclusion?
Financial inclusion is defined by The World Bank as a concept that ensures that people and businesses ‘have access to useful and affordable financial products and services’.
When it comes to Islamic finance, one of the key principles that facilitates financial inclusion is ensuring that there is access to savings and credit that is compliant with Sharia law. Research has found that in Muslim-majority countries up to 13% of people do not use conventional banks due to religious reasons [3]. The figures relating to financial inclusion in non-Muslim countries are likely to be much higher.
The United Nations and G-20 have both stated that financial inclusion is high on the agenda if globally we are to achieve sustainable development goals. Financial inclusion, therefore, goes beyond finances and relates to social and economic inclusion.
Why Is Financial Inclusion Important?
Financial inclusion is imperative because access to financial services is a driver of development, growth and opportunity. For Muslims, conventional financial services that are not compliant with Sharia law can result in a period of self-exclusion [4]. What Islamic finance facilitates and promotes is the inclusion of those who have been excluded on the grounds of religion. There cannot be equality of opportunity, access and sustainability without financial inclusion.
Financial services that are affected by self-exclusion:
- Lending and financing
- Insurance
- Savings
- Credit history
Evidence from countries such as Malaysia and Saudi Arabia has shown that Islamic finance not only improves outcomes for businesses but also helps the economy and presents opportunities for investors. Financial inclusion is an enabler of growth that is inclusive, compliant, and sustainable.
How does Islamic Finance Promote Financial Inclusion?
A system of well-designed financial services based on Islamic principles will not only enable Muslims to build financial resilience but ensure that they become active economic participants in the countries they live in.
Digital finance and mobile technologies mean Islamic finance is more widely accessible. The World Bank survey (2017) found that Muslims can often exclude themselves from using the formal financial institutions in place due to religious reasons [5].
Islamic finance is against the concept of asymmetric risk where one party has to lose if another gains. Instead, Islamic finance promotes risk-sharing that is not rooted in interest rates and speculative deals [6]. Certainly, in terms of micro-finance, Islamic finance is an emerging and fast-growing niche that aims to redress the current global imbalance when it comes to micro-finance and enabling marginalised groups to access financing options that work for them.
Islamic finance promotes financial inclusion, and by default creates significant financial migration. It provides an avenue for people with religious boundaries and principles to access financial services that were previously inaccessible to them. Islamic finance is not only about financial inclusion for businesses and individuals, it also attracts Islamic investors. This results in positive impacts at a local, community and global level.
Islamic finance is one of the fastest-growing industries in the finance sector. Governments and organisations including the World Bank and United Nations have all recognised that financial inclusion is imperative if global economic and sustainability goals are to be met. Also, if governments (particularly in the West) want political participation and empowerment for Muslims then financial inclusion is key to achieving that inclusion.
It is also important to remember that Shariah-compliant services are based on principles of equality and social justice. Therefore, financial inclusion and Islamic finance really do have the same end goal in mind – social equity.
References
1. https://corporatefinanceinstitute.com/resources/knowledge/finance/islamic-finance/2. https://www.theguardian.com/money/2013/oct/29/islamic-finance-sharia-compliant-money-interest3. https://www.brookings.edu/blog/future-development/2017/06/08/can-islamic-finance-boost-financial-inc...4. https://www.emerald.com/insight/content/doi/10.1108/IJIF-07-2018-0074/full/html5. https://globalfindex.worldbank.org/sites/globalfindex/files/2018-04/2017%20Findex%20full%20report_0....6. https://developingeconomics.org/2019/04/05/islamic-finance-and-financial-inclusion-who-includes-whom...
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