Unsecured Business Loans
Unsecured loans are popular with businesses looking to raise money. The borrower receives a lump sum of cash, from their bank or other lender, and they repay it over a number of months or a few years. The money is put to work in the business and if all goes well, it should help generate revenues and profit that enable repayment of the loan plus any associated costs.
What is an unsecured business loan?
An unsecured business loan is where a business borrows money without providing security. This security is usually in the form of an asset, such as a building or valuable piece of equipment, which the business owns. This asset becomes a form of guarantee to the lender. Should the business be unable to repay the loan, the lender is given the right to take control of the asset and use it to recover some or all of the debt - typically by selling it.
An unsecured business loan is not linked to an asset in this way, which means the lender is taking a greater risk. If the business can't afford to repay the debt it will be more difficult for the lender to get the money back.
In recent years, it's become common for company directors to sign personal guarantees when taking out an unsecured loan. This gives the lender more confidence they have some recourse should the business become unable to make repayments.
Reasons for taking an unsecured business loan
One of the main reasons why businesses borrow is to fund growth plans. This growth requires investment in advance - it could mean opening a new office, hiring new staff or purchasing new equipment. Many businesses don't have the working capital needed for such investment, meaning they need to find a way to raise the funds. An unsecured loan is a common choice.
As part of the growth plans the business owner will usually have prepared a business plan. This sets out how they intend to spend the capital they have borrowed and includes a budget for repayments.
If a business wants to borrow because it faces cashflow difficulties in its daily operations, it's unlikely to be approved for an unsecured loan. Before they agree to make a loan, potential lenders will perform a series of checks on the business and business owners, in order to assess the credit risk. This includes looking at the firm's credit history, its credit rating, and reviewing information supplied by the business such as financial accounts, budgets and cash flow projections. These checks help the lender to quantify the financial health of the business.
For businesses facing short-term cash flow problems, other forms of funding could be more accessible, such as invoice finance or merchant cash advances.
Benefits of an unsecured business loan
Ideal for smaller amounts - Unsecured loans are typically for smaller amounts, usually less than around £15,000.
Quicker to arrange - Because the amounts are smaller and there are no assets involved, the legal and financial application processes are faster. It's often possible to arrange an unsecured loan in just a few days.
Good for businesses with trading history - Finance providers look more favourably on businesses and owners who can demonstrate a history of growth over a number of years. Such businesses will have a better credit score, because they have managed their finances well.
Assets not put at risk - An unsecured loan leaves control of all the assets with the business.
Alternatives to an unsecured loan
While they can be a convenient way to raise money for your business, an unsecured loan is not always the most cost-effective solution, as the fees tend to be higher to reflect the risk to the lender. These loans can also be hard for startup businesses to access, because they lack the trading history needed to demonstrate creditworthiness.
Alternatives to unsecured loans include:
- Equity finance, such as funding from an angel investor or venture capitalists.
- A private loan, from friends or family.
- A secured loan.
- An overdraft facility with your bank.
- A mortgage on property.
- A startup loan, designed for very new businesses.
- Peer-to-peer crowdfunding.
The range of funding options continues to increase, with a growing number of fintechs bringing innovation to the business finance market.
Funding for growing businesses from Qardus
We help business owners get access to growth finance. The funding we provide is of between £50k and £200k on terms of between 6 and 36 months.
You can use this finance for a variety of business purposes, such as purchasing new equipment or other assets, hiring and training new employees, investing in improved processes or boosting your inventory. Our funding allows business owners to invest for growth. Because we want to see businesses do well, we work with firms that have a proven product and a strong management team.
Our clients are drawn from across the UK, operating in different industries. What they have in common, in addition to their growth ambitions, is a commitment to the wider community, good governance and strong ethical principles.
The funding we provide is certified Sharia-compliant, meaning it's operated in line with Islamic finance principles. This does not mean it's only available to Muslim-owned businesses. Many of our clients are outside the Muslim community but they share our values, and operate in industries we are open to supporting.
If your business is looking for growth funding that's fast, affordable and ethical, get in touch with us today.
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As more and more people attempt to get their foot onto the property ladder, this article will examine in detail the alternatives to conventional mortgages. In recent years there has been significant growth in alternatives to traditional mortgages, and what this means in principle is more choice for those looking to purchase assets or property in a Sharia compliant way.
There are many different reasons why people look for alternatives to mortgages:
- Flexibility: people want more flexibility when it comes to financing property or asset purchases.
- Accessibility: for some investors, alternatives to interest-based mortgage products are problematic as they contravene Islamic finance rules and ethical investment principles.
- Cost: alternative mortgage products can be cheaper overall than the standard mortgage products available in the UK, especially for those with poor credit scores.
- Less risky: there is sometimes less risk associated with alternative mortgages.
ALTERNATIVE MORTGAGES - WHY?
A conventional mortgage arrangement exists as a loan between a lender (bank) and an individual or company. The lender lends you the money to buy the property and in return, the borrower repays the money they have borrowed plus interest.
The mortgage loan itself is secured against the property and against the value of the property.
For many potential homeowners, a conventional mortgage is not a viable option, especially those looking for Islamic finance or ethical mortgages.
One of the main reasons traditional mortgages are shunned is that they are interest-centred and therefore not Sharia compliant. This has led to Muslims and ethical investors looking for alternative financial products to source funding when buying a property.
Interest is strictly prohibited under Islamic finance rules, so Muslims have had to look outside the traditional mortgage market in order to secure funding for their real estate and asset purchases.
However, it is not only Muslims who are looking at the market for alternatives to traditional mortgage products and services. As the ethical finance market continues to grow, many ethical investors and purchasers are also looking to secure funding that comes without hefty interest payments and charges.
Islamic banks and products under the Islamic finance banner are often considered to be a safer option than the finance options available on the mainstream finance market. The reason for this is that they are seen as less risky and less speculative.
Let's have a look at the alternatives out there and whether or not they are deemed to be halal or haram under Sharia rules.
Buy To Let Loans
Buy-to-let mortgage loans are designed for those people or businesses who want to purchase real estate properties with the purpose of renting the property out. Once the property is let, the homeowner then generates revenue through the rent payments they receive from the tenant.
Normally, these types of mortgages are based on higher interest rates than conventional mortgages and for this reason alone they are not Sharia compliant and are deemed to be haram.
There are some Islamic banks within the UK that offer a buy-to-let mortgage product, and if you want to review what is on offer you need to make sure that the product is 100% Sharia compliant.
Certainly, conventional buy-to-let mortgages that include interest in the repayment structure are not permissible for Muslims.
Home Purchase Plans
Home purchase plans are structured to avoid the charging and paying of interest. Normally a home purchase plan will involve the bank and the homeowner taking part in a shared investment strategy.
The bank, or financial institution, will purchase the property outright on behalf of the homeowner. The bank and the homeowner will agree the payments that the homeowner will make to the bank in lieu of repayment.
The homeowner will then make the repayments to the bank until they have paid off the pre-agreed price of the property. Once all the payments have been made the homeowner will own the property outright.
Home purchase plans give customers the opportunity to get on the property ladder in a halal and Sharia compliant way.
This type of co-ownership arrangement means the bank and the borrower share the risk and no interest is payable.
Shared Ownership Schemes
A shared ownership mortgage enables the purchaser to buy a share of the property. The purchaser then pays rent on the remaining share which is often owned by a non-profit organisation such as a registered social housing provider.
Shared ownership schemes were developed to enable people to get on the property ladder in an affordable way.
When structured correctly, shared ownership mortgages can be halal. If the share (of ownership) being purchased is clearly defined, and the rent on the remaining share is based on payments which are fair then this could be considered a halal alternative to an interest-based mortgage.
Make sure that the rental payments do not attract any interest, and that the terms and conditions of the ownership scheme are clear and concise. In the United Kingdom, shared ownership schemes are regulated and can often be an effective way to get on the property ladder.
If you are interested in a shared ownership scheme, look to see if they are being offered in your local area, and then look to see if any Islamic banks are offering shared ownership services.
Guarantor Mortgages
Guarantor mortgages are for those people who are unable to purchase a property, or secure funding to make the purchase, on their own.
A guarantor is involved who guarantees that they will repay the mortgage loan amount if the borrower does not make the payments.
Usually, the guarantor is a family member or close friend.
Whilst Islamic finance does permit the concept of a guarantor, in order for the service to be halal it needs to follow Sharia rules relating to such transactions. For example, a guarantor can be involved in a joint purchase transaction. In this type of financial transaction, the guarantor owns a share of the property and the risks are shared.
This is a musharakah arrangement - that is a profit-sharing arrangement or partnership.
If the guarantor mortgage is simply one where the guarantor guarantees the loan repayments with zero ownership rights then this is not permissible under Sharia rules.
Crowdfunding
Crowdfunding is a relatively new alternative to conventional mortgages. In its very basic form, crowdfunding operates by way of a collection of funds from a crowd of people (investors).
Whilst historically, investment markets have tended to be reliant on interest. However, Islamic crowdfunding is an activity that is deemed to be halal. Funds collected from a community have never been prohibited. In fact, crowdfunding in its very essence can have a positive social impact and this is a key principle of Islamic finance - social responsibility and ethical finance.
Anyone considering crowdfunding should ensure that the crowdfunding arrangement is set up to be fully Sharia compliant.
Self-Build Mortgages
Self-build mortgages are for those people who want to build their own homes. What this means in principle is that the loan is released to the borrower in stages that coincide with the stages of the build taking place. The final loan amount if based on the value of the property once it has been fully completed.
This type of alternative to the conventional mortgage is not halal as it still incurs the same type of interest payment as a standard up-front mortgage does.
Conclusions
Muslims have been wanting Sharia compliant alternatives to standard mortgages for many years. To address this, banks in England and other western economies have developed Sharia compliant alternatives that enable Muslim and ethical investors to buy a house or a business property/asset.
Halal alternatives to interest-based mortgages have several unique features. They are less risky, less speculative, and more socially responsible.
In recent decades Islamic finance principles have become more mainstream. Two key components in Islamic finance are Islamic banking and Islamic insurance which is also known as takaful.
Takaful is a form of Islamic insurance, but it is different from conventional and western insurance policies. Geared towards a Muslim customer base, takaful involves a pooling system whereby members each pay money into a pool fund and effectively guarantee each other against losses and damages.
Essentially, takaful is a system within Islam of mutual insurance. It is based on the following principles
- mutual assistance
- solidarity
- co-operation
In addition, the takaful system is designed to be fully Sharia compliant and in line with Islamic principles relating to financial transactions.
That means takaful does not include any form of interest (riba), or unjust enrichment (gharar). Members who pool their funds are protected by each other by pooling their respective contributions. These contributions are then used to provide financial cover for those within the group who face a claim or a loss. The system of collection and distribution is an ethical and Sharia compliant experience for the participants.
This article will examine how takaful works, and the main Islamic principles relating to this form of insurance.
Principles Of Takaful
As mentioned above the three main principles relating to takaful are mutual assistance, solidarity, and co-operation that offer protection from losses.
These principles mirror the core Islamic finance principles that centre on ethical funding and social responsibility.
- Mutual assistance: this principle is based on reciprocal help. Participants or members of the takaful fund help each other out, and in doing so they share the risks and rewards of the scheme.
- Solidarity: the takaful system is based on principles relating to social solidarity. This reflects the ethical stance within Islamic finance which focuses on the benefit to society rather than the individual. The social solidarity aspect of takaful fosters and enhances the sense of community among the participants. What this means in reality for customers is that their financial needs are met, whilst they are also helping others.
- Co-operation: As it is based on the principle of mutual support, it is clear that co-operation is key for takaful schemes to succeed. Each member must agree to co-operate with the others for the greater good of the scheme.
How Does Takaful Work
Takaful involves the following components:
- Pooling of contributions - participants all contribute to the fund which is managed by a takaful manager
- Providing insurance coverage - the fund offers participants insurance coverage for specified risks
- Processing claims - the takaful operator manages the claims
- Costs - the cost of administering the takaful system is covered by the contributions made
- Profit sharing - as there are no middlemen (as is the case in traditional insurance products), the profits are shared. This means that if a claim is made the takaful operator uses the funds already in the pool to settle the claim
TAKAFUL - IS IT REGULATED?
In many countries across the globe, there is regulation of takaful schemes. Especially in countries that have adopted Sharia law. In Muslim countries takaful sometimes forms part of government services and policies.
How takaful is regulated depends on the country and region you operate within. Typically, a takaful scheme will be governed by the insurance rules and regulations of that region.
The type of protection on offer includes insurance industry regulations, business regulations, tax laws, and consumer protection laws. You should always check the status of any takaful scheme before joining it.
Benefits Of Takaful Insurance
There are many different advantages of taking part in takaful insurance. The main benefit to Muslims is that they can benefit from an insurance scheme that is Sharia compliant.
Some of the other key benefits of takaful include the following:
- Flexibility: takaful insurance can be tailored to meet the specific needs of an individual or business.
- Ethical Investment: As takaful operates in compliance with Islam and Sharia rules, it means that is it an ethical and attractive option for those who want to invest in a socially responsible way.
- Mitigated Risk: Pooling contributions via takaful insurance reduced risk for all involved and also generates revenue to deal with insurance claims. Overall, takaful offers an ethical strategy when wanting to secure an insurance policy.
- Financial Protection: of course, one of the main benefits of takaful is the financial protection those within the pool are offered. This means policyholders have protection against unexpected events via the insurance policy and their business. product and asset collection can be covered.
Takaful In The United Kingdom
Takaful has increased in popularity in the United Kingdom with the increase in consumers and investors looking for ethical and alternative insurance options to protect assets and manage risk. Globally, there is also a demand for takaful projects, including in Kenya, the Middle East, South East Asia, and the wider African region.
In the UK, takaful insurance products are available and offer protection for a variety of risks such as life insurance, motor insurance, and health insurance. In fact, the UK takaful insurance industry has seen significant growth in the last decade.
Takaful Insurance
Those businesses and brokers offering takaful insurance usually work together with traditional insurance companies to create bespoke insurance coverage for their clients. Conventional insurance and investment products are based on underwriting risk. In contrast, takaful is based on co-operation and the pooling of funds.
Takaful insurance that is offered by brokers and businesses is subject to the same regulation as other insurance products. In the UK, takaful insurance is regulated by the Financial Conduct Authority (FCA).
Anyone looking for takaful insurance in the UK should ensure they approach reputable brokers and those who understand the concept of Islamic finance and Sharia law.
When doing research you can visit the website or online platform of the company offering the takaful insurance so you can assess how the company prices and offers the takaful product and find all the information you need.
Takaful is a great financial planning option for those people who want insurance cover that is Sharia compliant and aligns with ethical values.
When it comes to investment strategies, ethical investing (also known as impact investing) is gaining traction. Some commentators have credited the likes of Greta Thunberg for the increase in demand for impact investment products, but this type of investing has been around for centuries in religious communities and societies.
Impact and ethical investments concentrate on approaches and strategies that facilitate inclusion and integration. As a result, the transaction has a positive impact on the social and economic environment. The investment itself is deemed to be one which benefits the investor and the wider community.
For investors looking to align their ethics and values with their financial output, they want to be sure that their portfolio grows in a sustainable way that supports their role as an ethical consumer and investor. Many mainstream funds do not offer ethical products and services, but the tide is changing fast and there are more companies offering bespoke ethical funds for discerningly ethical investors.The main benefits of ethical/ impact investing include the following:
- The values of companies and investors can be aligned
- Companies committed to social causes can be supported
- There is a feel good factor associated with ethical investments
- For religious communities, ethical investments are compliant with religious rules relating to investing (Sharia rules for Muslims)
- Ethical funds are a real catalyst for change
- The financial outlay does what it says on the label - ethical investment
Socially Responsible Investments
Socially responsible investing is a term associated closely with ethical investing. Socially responsible investment has a social conscience and does not negatively impact society. There are many companies on the market that offer investors the opportunity to invest in funds that provide positive social change and impact.
Of course, for Muslim investors socially responsible ventures have always been on the agenda, even when the opportunities to invest responsibly were not widely available on various platforms. Islamic finance dictates that Muslims should not invest in any project that could be detrimental to individuals or society as a whole. This is part of a much broader Islamic value-based social system. Muslims are instructed to safeguard society, the environment and make ethical choices that do not negatively impact society.
Ethical Investments
The definition of ethical investing is centered on the core concept that it is possible to align your financial goals with your moral and ethical values. Ethical ventures are focused on ensuring that the primary filter when selecting opportunities relating to money is based on ethical principles and considerations. There is a demand for increased transparency when it comes to shares, trusts, stocks, bonds and returns.
Used interchangeably with socially responsible and impact investing, ethical investments require due diligence before the capital is actually spent. Assessing whether a fund is ethical is based on using certain environmental, social, and governance criteria which can help you decide whether your investment is, indeed, ethical and socially responsible.
What ethical investment facilitates is the ability for individuals to allocate their capital with companies and funds that align with their own personal beliefs. One example of this is investors who want to avoid industries deemed to be unethical such as gambling, porn, weapons, and alcohol.
For Muslims, ethical ventures go further and also seek to ensure that the investments are compliant with the principles of Islamic finance and Sharia law.
Islamic Finance And Ethical Investments
Whilst ethical transactions may appear to be a relatively new concept in the West, Islamically, ethical investments have been a central principal of Islamic finance for centuries.
Historically, religion and ethical investing have been aligned. Islamic finance prohibits any financing of industries deemed to be haram.
Socially responsible investing and Islamic finance have seen rapid growth in recent decades, and it is no coincidence that the two go hand in hand. Islamic finance centres on principles of social responsibility and impact. This is achieved through principles of sustainability, positive impact, and strong governance.
More and more investors are joining Muslim investors in looking for ethical funds, and funds that offer green funds, or those that support the environment positively.
In recent years, the growth of ethical investing has been fuelled by religion AND social views. Social trends that have begun to lean towards ethics, environmental impact, and transparency have meant that ethical investments have become more mainstream.
In the 90s there was a move away from funds and ventures in the fuel and coal industries, and industries using animal testing, as these were seen as being harmful to the environment and society as a whole. Moving away from environmentally damaging industries was seen as a way of problem-solving some of the damage caused by the operations of these industries.
Sharia Compliant Investments
Ethical halal investing focuses on socially responsible principles, prohibiting:
- Riba (interest)
- Gharar (speculation)
- Financial transactions in industries deemed to be haram such as the tobacco, alcohol and gambling industries
Environmental, Social, And Governance Considerations
In order to assess whether your portfolio is indeed socially responsible and ethical ,there are certain criteria that you can use. The criteria can broadly be divided under three main categories - environmental, social, and governance.
Investors need to review a broad variety of behaviors to understand if the investment is indeed sustainable, responsible, and socially impactful.
ENVIRONMENTAL
Environmental factors to look out when investing include assessing the impact of the investment on the following:
- Climate
- Pollution
- Waste
- Water stress
- Energy use
- Renewable energy
- Conservation
- Carbon footprint and ecological footprint
- Local economic policies
Environmental criteria will assist investors and companies to ascertain the impact of their ventures on the wider environment. Ethical companies should be aware of the environmental impact of their investments by using the criteria above to ensure that the risks are being identified, assessed, mitigated, and managed.
For example, investing in land development may seem like an ethical project, but what if the development adversely impacts local populations, natural resources, and contamination?
GOVERNANCE
In similar vein, anyone investing with a company will want to ensure that the company they use has a very transparent and accurate governance structure in place. Without strong governance, there is less accountability when it comes to ensuring that the investments you make are socially responsible.
The financial reporting and accounting methods, shareholders involvement, accountability, and financial management must have clarity and be transparent. For Muslims, they will also want to ensure that the investment company does engage in any investment behaviours deemed to be haram under Sharia law and Islamic finance rules, and ensure that haram industries are avoided.
When examining the practices of companies and businesses claiming to have ethical investment services and products, the following criteria should be carefully examined:
- The ethical and moral stance and values of the company
- The diversity within the company, shareholders, and board members
- The voting rights of shareholders and profit sharing arrangements
- Previous governance records
- Tax treatment and financial transparency
- What anti-competition practices are in place
- How the company manages financial and ethical conflicts of interest
- Asset management strategies and choices
- How the company treats its customers and investors
SOCIAL
Social criteria focuses on the business relationships of the investment company/ investment and the social impact.
Socially responsible investing focuses on social values, the environment and good governance. Does the investment company you want to invest in hold similar values to you? How committed are they to ethical values? Do they uphold Islamic finance principles? Does the company donate to charities that align with your charitable focus?
When considering the social criteria, you need to look out for investment and financial impacts on the following:
- Supply chain labour
- Ethical sourcing
- Data and privacy
- Protocols relating to health and safety
- Impact and bonds with local communities and links with them
- Previous investment history and sectors invested in
- How the investment portfolio is socially responsible
Ethical Investing
In order to ensure that the investment you make is ethical, you need to ensure that you do your research and analyze the historical, present, and predicted performance and standards of the investment you are interested in. Of course, there are many companies that offer ethical investment products, but that does not mean investors are absolved of their own personal responsibility to undertake research and ask their own questions.
Investors should:
- Review the mission statement of the investment company
- Check their track record of investments
- Review their ethical values and see if they align with your own
- Check if the company complies with laws and statutes
- Understand how ethical investments and funds operate
Is Ethical Investing Profitable
Ethical investing does not guarantee a profit. However, when it comes to the performance of ethical funds as compared to traditional investment funds, there does not appear any significant difference. In fact, ethical investments can sometimes outperform traditional investment funds.
The whole point of ethical investing is that you can invest your money in a way that yields positive results on society and also makes a profit. According to an article in the Guardian (December, 2021), in the United Kingdom alone, the annual spending on ethical services and products has exceeded £100 billion [1]. With the onset of the global pandemic and climate change, people are looking for ethical investments and industries far more than ever before.
The Future Of Investing
We have entered an era when socially responsible investing is increasingly in demand. The increase does not only relate to ethics and morals, but is also centered on principles of sustainability, investor goal-setting, values, protection of the natural environment, whilst still making money.
Gone are the days when investing in the stock market was solely for the purpose of generating income, with no thought for the impact of the investment. Modern ethical investors are keen to ensure their investments are transparent, socially responsible and with solid governance structures in place. Sustainable long term results are seen as aligning with the much broader objectives and principles within Islamic finance and the wider society.
For too long, investments have focused on profit margins over values. Ethical investing means that profits can still be prioritized, but they ranked alongside ethics and values and do not lead to the social exclusion of marginalized groups or countries.
Tips To Invest Ethically
Investing ethically is about more than making sure your investment appears to be ethical. It is focused on investors learning about what it is they are investing in, the social and environmental impact, and holding investment companies to account.
The following tips will help you avoid investments that do not align with your personal values and goals:
- Assess and identify your values and principles
- Learn about ethical investments and how they operate
- Build your investment portfolio carefully with sustainability and social responsibility in mind
- If you have ISAs or pensions review where they are invested
- Check your investment strategy - do you want to focus on start-ups or existing ethical investment companies?
- Make sure you diversify your portfolio across regions and sectors
- Planning your investment in advance
Sources Used In This Report
[1] UK annual spending on ethical products surpasses £100bn for first time [The Guardian, Dec. 2021] [https://www.theguardian.com/money/2021/dec/31/uk-annual-spending-on-ethical-products-surpasses-100bn...]
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