UK gets its first Islamic crowdfunder for business financing

As a business owner, you're always making plans for your future. You're planning ahead on a daily, weekly and monthly basis, looking ahead to anticipate challenges and opportunities. Whether your business is in its early days or it's become established in its market, you'll always be thinking about tomorrow and what comes after.

A vital part of that planning is around finance - how you're going to pay for the people, the stock and the infrastructure you need not just to keep going, but also to grow the business. You want to avoid running out of working capital - cash - because that's the lifeblood of commerce. It's cashflow that makes or breaks a business.

For many, finance planning isn't the most exciting part of running your own business. But it is perhaps the most important task, and certainly one of the most rewarding when you get it right. Investing time in finance planning can literally pay dividends in the form of better cashflow and improved profits.

If you're undertaking any major new project in your business, such as launching a new product range or expanding your geographical market, you expect to put together a business plan. This covers all aspects of the project, including the financial element - this is your finance plan.

Here are our suggested steps for putting together that business finance plan.

Step 1 Know what you need and why

Most planning starts with having the end in mind. You have a vision for where you are going - such as opening branches in new locations, increasing turnover by a specific amount or becoming a recognised brand in a new market.

In your business plan you'll set out the steps you need to reach that destination. You'll identify your current strengths and weaknesses, also the opportunities and the threats.

The business plan will detail the actions you need to take, along with their anticipated costs. These are likely to include:

• Purchase of stock or equipment
• Marketing costs
• Employment costs

Your planning will also factor in the impact of new revenue streams, when your investment in growth begins to generate new sales. This should lead into a cashflow plan, where you document projected income and costs over time. The cashflow plan will help you to see how much funding you need and over what period of time.

Step 2 Understand your current numbers

Having planned for the future, you also need to have a strong grasp of where your business is today. Without a realistic understanding of current income and costs and the cashflow associated with these, it's hard to plan for the future.

However, you also need to be aware of other numbers in your business, such as the value and type of assets that you have and the existing levels of debt and their associated repayments.

Most businesses carry some form of debt, such as an overdraft, a loan or credit cards. Alternatively, there could be an obligation to repay an external investor, such as a business angel. While the expectation of repayment may still be some way in the future, it should be factored into your numbers and planning.

If you're looking for funding for a major new initiative that will grow or transform your business significantly, this presents an opportunity to restructure your firm's finances. You could consolidate existing small debts, or even do away with them entirely by taking on funding in a different form.

Step 3 Research your options

When you're raising funds to grow your business there are a number of routes you can take. Your choice depends on factors that include:

• Your credit rating
• Your attitude to risk
• How much control you're willing to give away

You should consider taking professional advice about raising finance for business growth, drawing on the knowledge and experience of others. Be sure to take into account the impact of taxation on your decisions. Take a look at how similar businesses are financing their projects.

It's possible that some of the assets your business owns can be used as collateral for finance, or used in another arrangement to release capital, such as a sale and lease back.

Where appropriate, involve others with a role in the management of the business, such as directors and other senior staff.

One major decision will be whether you decide to raise debt finance or equity finance. You can read more about this in our article 'Choosing the right funding option for your business'.

The more information you can gather at this point, the better informed your decision will be.

Step 4 Create your finance plan

As you pull together all the information you can start to make a finance plan based on your preferred funding options.

At the heart of your plan will be a cashflow forecast, which sets out the incoming and outgoing cash movements over time. This can be built in a spreadsheet or in a dedicated finance modeling app. Building the plan in a spreadsheet or app should allow you to adjust it based on different scenarios, helping you to assess the impact of various changes.

You may want to create alternative plans, based on different approaches to raising the finance - such as taking out a loan over several years versus receiving investment from a business angel.

Step 5 Review your plan in detail

Share your financial plan with others to get their feedback. Encourage them to question your assumptions and to suggest alternative options. The larger the project, the more important it is that you have a finance review by a professional, such as your accountant. An objective opinion from someone outside your business can be hugely valuable, particularly when they have experience of finance planning for similar projects.

Step 6 Source funding providers

Having thoroughly researched, built and tested your finance plan, it's time to approach potential funders. This could be a bank, a venture capitalist or a business angel, or some other provider of business funds. Your planning will have helped you identify at least one, and possibly several, funding options.

Depending on the scale and basis of the funding you're looking for, potential providers will have different questions and require specific information from you. This can include:

• Your firm's past financial performance
• How your business is managed
• Projected future cash flows

This information, along with other details about your proposed project, will be easy to supply if you've done a thorough job of your finance planning.

Funding your business project with Qardus

We work with owners who are looking to grow their small or medium-sized business. Having already proven their product and their process in the market, they're now seeking funds for major growth initiatives.

The funding we provide is from £50k to £200k with terms of between 6 and 36 months.

We're different from banks and most other UK finance providers because we don't charge interest. Our funding arrangements are rooted in Islamic community principles and are certified as Sharia-compliant. This also means we don't work in business sectors considered damaging to society, such as alcohol, tobacco or gambling.

Because of our principles, our funding solution is proving a popular choice not only with Muslim business owners, but also with others committed to ethical and community values.

Talk to us about getting access to fast and flexible growth finance.

In this week’s Company Focus segment,JEVITHA MUTHUSAMY shines the spotlight on Qardus, a new Islamic fintech start-up aspiring to close the SME financing gap in the UK.

The beginning
It took the Qardus team 10 months to conceptualize, build, test and launch its Shariah compliant peer-to-peer financing platform on the 3rd July 2020. “I wanted a platform that offers fast and affordable Shariah compliant business financing to SMEs,” Hassan Daher, the founder and CEO, tells IFN. Qardus offers SMEs a chance at alternative financing as they believe many SMEs are not eligible for bank financing.

Market Insiders reported that the funding gap in the UK has grown to US$77 billion as of 2019. The largest hurdle the start-up faced was securing the right approvals. The firm is an appointed representative of Share In which is regulated by the UK’s Financial Conduct Authority while Qardus’s Shariah compliance is monitored and approved by Amanah Advisors.

“It is important for us to be Shariah compliant as there are over 950,000 SMEs in the UK that are financially excluded due to the lack of financial products that conform to their ethics and beliefs,” notes Hassan.
The presentQardus currently offers Shariah compliant working capital financing up to a maximum of GBP100,000 (US$125,640) and is targeting small businesses with GBP100,000 in revenues or assets.
“Due to the pandemic we are focusing on recession-proof industries. If you look at the small business on our site, it is essentially pharmacy and pharmaciesare doing really well right now, food manufacturing companies are also one of the sectors that are doing well,” explains Hassan.
While market opportunities are immense, Hassan acknowledges that it is a competitive segment especially with the emergence of new government initiatives in response to COVID-19 such as the Bounce Back Loan Scheme and the coronavirus business support loans.

The futureNevertheless, Qardus is working on distinguishing itself by being able to predict credit risk better than its competitors by using machine learning algorithms.
Over the next year, Qardus is looking to onboard around 150 SMEs with financing totaling an estimated GBP15 million (US$18.85 million) and within the nextfive years Qardus is looking to reach GBP500 million (US$630.19 million) in financing.

The platform is also looking to tap asset financing and possibly property financing. Aiming higher, Qardus is looking to provide its own technology solutions to existing lenders in the market and in turn, Qardus will do the sourcing, risk profiling and pricing of SMEs on their behalf.

Currently, Qardus is focused on making a mark in the UK and European markets but is also looking to expand to Southeast Asia and the Middle East in the future. As part of its expansion plan, the platform is also planning to become an Islamic challenger bank in the near future.

Capital at Risk. Returns are not guaranteed

The article is only available to the subscribers of Islamic Finance News here: https://www.islamicfinancenews.com/company-focus-qardus.html

Halal mortgage products and services started appearing on the market to help devout Muslims borrow money. By their very nature, mortgages have historically always been interest bearing.

Islamically, interest (riba) is strictly prohibited. This means that many Muslims were unable to access funding that would enable them to step onto the property ladder.

For many people, purchasing a family home (or refinancing) is an important lifetime investment. However, Muslims in the past have struggled to find halal mortgages that would be in compliance with Sharia principles and rules relating to financial transactions.

Previously, many Muslims not wanting to pay interest on conventional mortgage products would opt to remain in rental properties.

WHAT IS A HALAL MORTGAGE?

A halal mortgage is essentially a home purchase plan. It is not really a mortgage loan in the traditional sense of what we know a mortgage to be.

Halal mortgages are considered to be compliant with Sharia principles because they do not have a loan that is based on interest payments or accrual.

By comparison, traditional mortgages have always included interest payments.

Halal mortgages are more of a long term plan that is offered by the bank to the borrower. This purchase plan contains repayment terms and conditions. However, the purchase plan does not contain any element of interest.

What the purchase plan effectively becomes is more of a sale and lease agreement.The aim of a halal mortgage is to ensure that any prospective homebuyer who wants to purchase a home and wants the terms of the agreement to comply with Sharia law is able to access funding.

Any lender or bank that offers halal mortgages will have taken guidance and advice from experts in Islamic finance and Sharia law. This ensures that the halal mortgage products they offer are fully halal and Sharia compliant.

Comparison Between A Halal Mortgage And A Conventional Mortgage

The main difference between a halal mortgage and a conventional mortgage product is the element of interest.

In Islam, banks are not permitted to make profits from loans. Conventional mortgage loans are designed to profit the banks and the terms are often weighed heavily in favour of the banks. Customers are often required to pay back interest which can fluctuate depending on the market conditions.

The ethical Islamic finance principles that underpin halal mortgages mean that the power dynamic and relationship between banks and borrowers is more even.

HOW DO HALAL MORTGAGES WORK?

Halal mortgages do not involve the borrower borrowing a sum of money from the bank in the traditional sense.

Instead, what will usually happen is that the bank will purchase the property on behalf of the borrower. The property will then be leased back to the borrower. The repayments will cover the initial purchase price and costs, and also an uplift to enable the bank to make a profit.

The monthly repayments made by the borrower to the bank will be partly put towards buying the property back from the bank and partly towards paying rent for residing in the property.

Once the term of the halal mortgage ends, the borrower will have paid back the bank and will fully own the property.

If you are looking for a halal mortgage, then you need to ensure that the lender complies with Islamic finance / Sharia principles.

Types Of Islamic Mortgages

There are three main types of halal mortgage products that are available in the United Kingdom:

• MURABAHA

A Murabaha mortgage is one where the bank purchases the property and sells it straight back to the borrower. The bank makes a profit by selling the property to the borrower for more than it originally paid for it.

This is less of a home purchase plan, and more like a traditional mortgage process. As the home is being solD for money it is considered to be within the Sharia rules that regulate the financial transaction.

• IJARA

A home purchase plan that is an ijara one involves the bank (a Sharia compliant bank) becoming the legal owner of the property you want to buy. The bank will purchase the property and then lease it back to the borrower for a fee.

The borrower is then required to make monthly repayments on agreed terms for the fixed term of the 'mortgage'. The repayments will cover an element of rental payment, and also repayment of the capital that was used to make the initial purchase of the property.

Once the term of the mortgage ends, the borrower should have repaid the bank and be the full legal owner of the property.

Once the borrower takes full ownership of the property they can then remain in the property or sell it on.

• DIMINISHING MUSHARAKAH

Diminishing musharaka works differently to an ijara product. In this type of arrangement, the borrower and the bank jointly own the property as co-owners (similar to a business partnership arrangement). As the borrower makes the repayments, so their share of ownership increases and the banks share of the property decreases.The amount of deposit you put down will help determine your respective share of the property.

The good thing about diminishing musharaka products is that as the borrower makes the repayments, the rental repayment element decreases and the bank's ownership share will keep reducing as the borrowers increases.

DO I NEED A DEPOSIT FOR A HALAL MORTGAGE?

The answer to this question is yes. It is more likely than not that your lender will require you to put down a deposit.

Of course, the size of the deposit will vary depending on the type of product you opt for and the lender you choose.

Normally, lenders will expect to see something in the region of a 20% deposit if you want to access a halal mortgage. However, it is important for you to look around at all the halal mortgages on the market and decide which one meets your needs.

There are some products and services that require much less than a 20% deposit.

You should also be aware that there are some additional costs you need to prepare for including:

• legal costs
• survey costs
• building insurance
• stamp duty
• broker fees

Any borrower looking for a halal mortgage should know that having a good deposit puts you in a strong position.

Advantages Of Halal Mortgages

There are many advantages of having a halal mortgage, and halal mortgages are not only available for Muslims. Many non-Muslims are now accessing halal mortgage products and services as they understand the concept and underlying ethical basis they have.

Some of the main advantages of halal mortgages are as follows:

• According to experts, halal mortgages facilitate financial inclusion and access to property/ house ownership for previously marginalised groups
• Those who want to live by Islamic finance principles can access funding in order to get on the property ladder
• Islamic mortgages and services are an ethical way to fund property purchases
• Halal mortgages are regulated by the Financial Conduct Authority ( FCA ) so borrowers have protection
• Islamic mortgages are less susceptible to market crashes and changes in economics
• Halal mortgages can offer borrowers the chance to own real property with stable property value
• Halal mortgages are not normally subject to fluctuating interest rates
• Halal mortgages have been approved by scholars
• Halal mortgages do not incur or charge interest (interest is strictly prohibited in Islam)

WHAT ARE THE RISKS INVOLVED WITH HALAL MORTGAGES?

It is important to start by saying that halal mortgages are no riskier than conventional mortgages.

One of the main problems with halal mortgages is knowing where to find them and doing your due diligence. This can be a complex and time-consuming exercise.

Sometimes, the rental repayments can be higher than if you opt for a conventional mortgage repayment plan. However, this is the price that is payable for having a home purchase plan that does not charge interest.

There has some been criticism of halal mortgages in recent years for being expensive. However, most banks and lenders who offer halal mortgages will be happy to go through the terms with you and offer favourable rates and services.

If you miss your repayments under a halal mortgage, you will face the same consequences you would as if you had a conventional mortgages. If you do not make the necessary payments then you could face repossession and court proceedings.

Your initial outlay and costs may be higher with a halal mortgage. Many banks have higher administration and processing costs so always check the terms and conditions of any agreement.

However, remember that halal mortgages are fully regulated by the Financial Conduct Authority and this means borrowers have legal protection. You can visit their website to find details of the protections available to borrowers.

In addition, the Financial Services Compensation Scheme does apply to lenders offering halal mortgages.