Unsecured Business Loans - Your Alternative Options
If you're a business owner unsure about what's your best option for an unsecured business loan, you're not alone in being uncertain. On the face of it, there's an overwhelming choice of business loan providers, along with many different types of loan. How do you know what's right for you?The last thing you want is to sign up to a finance agreement only to discover:
- It costs you more than you expected.
- It's not as flexible as you hoped.
- You can't repay early without paying penalties.
To avoid problems like these, it pays to plan ahead and to assess your options carefully.Here are some alternative forms of business finance, not all of which are unsecured loans.
The traditional business loan from your bank
Years ago bank managers were open to taking a risk on lending money to business owners. But as layers of regulation have been added over the last few years, the historic banks have become more cautious about who they will support by providing finance. Even opening a business bank account is much more difficult than it used to be.
While regulation provides important protections to both finance providers and borrowers, the historic banks often add to this bureaucracy with their own internal processes and requirements. While these loans are usually unsecured, the bank wants some form of personal guarantee from the directors.
That said, every year businesses raise working capital by borrowing millions of pounds from the long-established banks, usually through fixed-term loans.
Borrowing from your friends and family
For many business owners, particularly those launching a new business, friends and family are the initial source of finance. This has its advantages, including:
- Often at a lower cost than a commercial rate of interest.
- Repayment options can be more flexible.
- Any interest or fees are kept inside your friends and family community.
While this approach offers a host of benefits, there are also potential risks to this informal approach to business finance. The lender could suddenly need some or all of their money back to cover an unanticipated need, or the business may not be able to meet the agreed repayments.
Personal relationships between friends and family can be put under pressure through these arrangements, if they are not managed well or if the business fails to perform as expected.
Asset finance
You could fund the purchase of a specific business asset - such as a building or a vehicle - using asset finance. This is a loan that's linked specifically to that asset and is usually secured against it. Should you fail to make the agreed repayments, the lender has legal rights to recover some of their money by taking control of the asset.
Secured loans, such as these, often take a little longer to set up because the process needs to include valuation of the asset and preparation of additional documentation. Your business can also use asset finance to release capital from an asset it already owns. Many finance providers are willing to advance cash against the value of an asset, even when it's been in use for a while.
The funding is repaid from future income that asset helps the business to generate.
Invoice finance or merchant cash advances
Both invoice finance and merchant cash advances are methods of boosting your working capital based on the value of your sales. Rather than receiving a lump sum of cash, as you do with a loan or similar form of finance, you get a rolling injection of smaller amounts of cash, in line with your sales. As turnover grows, the value of these injections can grow.
Invoice finance is suitable for businesses that sell on credit. When you raise an invoice that's due in, say, 30 days, the invoice finance provider pays you a high percentage of the value of the invoice. You benefit by effectively being paid a few weeks in advance - which improves your cashflow.
A merchant cash advance is more appropriate where you sell a considerable amount through credit and debit cards. You can get an advance based on the level of card sales you've enjoyed in the past.
Both these forms of finance help to improve your cashflow, but they're not designed to raise the large amount of capital you may need to invest in a new business growth project.
Investment finance
Whether it's through an angel investor, or venture capitalists, or some other arrangement, investment finance is where someone puts money into your business in return for a share of ownership. This means it's not a business loan, but typically a longer-term commitment with the intention of helping you to grow the business.
The finance may come with additional support, such as business advice and mentoring from someone with greater experience.
The investor typically expects to get their money back, and more, when the business has grown in value and their share is worth more. This may occur when you sell the business, which allows all the investors to capitalise on the money they put in.
The benefit of investment finance is that there are often no regular repayments to budget for, and the cash could come with additional support. The downsides include the dilution of ownership, and the possibility that the investor wants some element of control over how the business is operated.
Crowdfunding
The digital revolution has made it much easier for businesses to raise finance from the wider community, through crowdfunding hubs. These hubs allow people to invest often a relatively small amount of capital into a project. These amounts are aggregated together, giving the business a sizeable fund it can invest in growth.
Crowdfunding comes in various forms. It's popular with startups, particularly those who can establish a connection with a community of people interested in seeing particular ideas turned into viable products, such as video games or new technologies. Peer-to-peer funding networks also work on crowdfunding principles, but are generally more structured and offer more protection to those putting their money in.
Unsecured business finance from Qardus
If you're a business owner, if that business is profitable and if you're serious about growing it, we want to hear from you.
We've supported a wide range of businesses through our unsecured finance product. It's a community-based alternative to an unsecured business loan, and it's rooted in an ethical approach to commercial finance.
If you're considering taking out a business loan and you're open to exploring something that gives you all the same benefits and flexibility, and is also competitively priced, please get in touch with us today.
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The success of your business depends on you maintaining a healthy cashflow. You want to have money available in order to pay your bills and your staff on a weekly or monthly basis, along with having capacity for growth.
It doesn't matter how great your product or your marketing might be. The foundation of success for businesses, and the reason why some don't make it, is cashflow. The moment you don't have the money in the bank to pay your staff, suppliers or tax bills, you could be in big trouble. Cashflow planning helps you to see this coming, giving you time to take action.
Cashflow planning is essential
It's much more comfortable when you have consistent, positive cashflow. There are no moments of panic when you fret over how you'll pay a particular commitment. You have more time to plan ahead, to have an eye on the future rather than worrying about today.
Consistent, positive cashflow doesn't just happen. Being profitable doesn't guarantee that your business will always have the cash to meet your commitments. Income from sales doesn't always flow in fast enough to cover payments you need to make. Achieving a steady cashflow requires planning. It starts by making a cashflow forecast.
Prepare a cashflow forecast
A cashflow forecast is a plan of the money your business expects to receive and to pay out in the near future. It helps you to predict how much money will be in your bank account at any point in time. A cashflow forecast is usually broken down into months or weeks to make it easier to plan.
To construct your cashflow forecast you'll want to use a spreadsheet or a cashflow planning tool. Your accounting system can provide useful information about your past cashflow but it's not so helpful for predicting the future, because it's based on transactions that have already occurred.The benefits of preparing and maintaining a cashflow forecast include:
- You have better control over your business finances.
- It helps you to make realistic decisions about spending.
- You can plan for the future more easily.
Your cashflow forecast is just that - a forecast. The reality will turn out differently, although a well-prepared forecast won't be that far off what actually happens.
Use a forecast to make better business growth decisions
Growing a successful business requires you to make choices. If your business model is sound it's likely your business will expand naturally, at least in its early days. However, it won't be too long before the rate of growth levels off, as you've satisfied the initial levels of demand. Maintaining growth, or restarting it, requires decisions and actions that will bring in more customers and extend your opportunities to earn more revenue.
Your cashflow forecast will help you to assess the impact of these decisions. It allows you to model what's likely to happen in the future, as you incur more costs with the objective of growing sales.The forecast will help you determine the costs and benefits of actions such as:
- Launching a new marketing campaign.
- Taking on a new member of staff.
- Selling a new product.
- Purchasing new equipment.
- Expanding into a new geographical area.
- Raising additional working capital.
Forecasting requires making some estimates about likely future income based on your choices.
How to build a cashflow forecast
Whatever tool you use to build your forecast, it will have three basic sections. These are:
- Incoming cash
- Outgoing cash
- The net balance
Step 1 - Incoming cash
This section is a list of your different sources of income. Depending on how you sell, you may want to break this down into different categories based on the type of income, such as cash sales, credit sales, credit card settlement and the like.
Not all incoming cash is from sales. You may also receive cash from loans, equity investments, tax refunds and other sources.
Once you've completed this section, you should have a clear idea of how much money you expect to receive on a weekly or monthly basis, over the period of the forecast. Typically, a cashflow forecast will look six months to a year ahead, and longer for bigger projects.
Step 2- Outgoing cash
In the same way, list all the payments made from your business. Be sure to include every form of payment, and take care to include irregular or annual payments. To help you check that you've not missed something, take a look at your accounts for the previous year to see what payments were made.
Payments you're likely to have in this section include:
- Stock purchases
- Payroll
- Tax payments
- Loan repayments
- Asset purchases
- Expense reimbursements
Once you've completed this section you should have a total for the cash outgoings on a weekly or monthly basis.
Step 3 - Net balance
The net balance is the difference between the total incoming cash and the total outgoing cash. If you add your opening bank balance, the cashflow forecast will now give you an estimate of how much money you will have in your bank account on any particular day.
In a strong, healthy business the net balance should be positive. If it's not, the forecast will help you to identify the reason. It may be that you're investing in business growth, which will bring in more future sales income but involves advance costs. The forecast will help you identify whether you need to source short or medium-term funding from elsewhere, and the scale of that funding.
Common problems with cashflow forecasts
Errors occur in cashflow forecasts because the process involves making estimates and it often relies on data that's input into a spreadsheet manually, rather than taken directly from your accounting system.
Problems to look out for in your cashflow forecast include:
- Overlooking VAT on sales, purchases and tax payments.
- Inaccurate information about future receipts and payments.
- Big differences between actual and estimated sales.
It takes time to build and refine an accurate cashflow forecast. Don't be surprised that you need to alter yours often, adding in unexpected receipts and payments.
Keep your forecast up to date
Because your cashflow forecast is based on estimates and assumptions, it will very quickly differ from what actually happens. This means you should update it regularly and often. A well-run business will maintain their cashflow forecast several times a week, perhaps even daily, to keep it as accurate as possible.
Cashflow planning is a vital business activity that you can't afford to overlook or put off. If you're planning to grow your business successfully, the time you put into cashflow forecasting is a wise investment.
Ethical business funding from Qardus
We support growing businesses by providing growth finance of between £50k to £200k on terms of between 6 and 36 months. This finance is helping UK-based small and medium-sized companies to expand their operations and their market share.
We fund businesses that have demonstrated their capability with a proven product and management team. Our clients are drawn from many different industries, but our ethical position means we cannot work with companies involved with products considered detrimental to the welfare of society, such as gambling, alcohol and tobacco. This is because we operate based on Islamic community principles. Our funding process is certified as Sharia-compliant.
We work with businesses and their owners both inside and outside the Muslim community. Any business that operates in line with our ethical values is welcome to apply for funding.
If your business is looking for growth funding that's fast, affordable and ethical, get in touch with us today.
Islamic Finance provides a financing mechanism without Riba (interest), Gharar (gross uncertainty) and Maysir (gambling). These three are the key to all economic oppressions, economic imbalances and instability. They give rise to micro and macro risks which impact the overall wellbeing of an economy. Islamic Finance offers alternative structures and products which are free from Riba, Gharar and Maysir. One of these products is Commodity Murabaha.
In minorities where it is difficult to get Shariah compliant working capital financing for SMEs, Commodity Murabaha is an alternative Shariah compliant product and financing mechanism. Commodity Murabaha is the most common Islamic money market tool that is used to provide liquidity in the short-term Islamic money markets. The AAOIFI Shariah Standards, the majority of global Shariah scholars and global Shariah boards approve of Commodity Murabaha if it is implemented correctly with the correct controls to overcome financing challenges. The classical jurists also approved of a Tawarruq or Commodity Murabaha structure. In fact, Mufti Taqi Uthmani has produced a detailed research paper on Commodity Murabaha outlining the views of classical scholars. Ibn Muflih from the Hanbali school, Imam Shafi’i, Ibn al-Humam and Ibn Abidin from the Hanafi schools have all permitted this product and narrate its permissibility from other classical jurists[1].
Working capital financing is used to cover a company's short-term operational needs and not to buy long-term assets or investments. Those needs can include costs such as payroll, rent and inventory and other costs associated with daily operations etc. Practically, business owners who are looking for shariah-compliant working capital financing to cover their short-term operational needs generally prefer entering a Commodity Murabaha Agreement where a fixed profit rate and corresponding deferred sales price instalments is specified in advance. This allows them to finance their growth at a lower cost of capital as compared to for example using profit and loss sharing (PLS) arrangements such as Mudarabah and Musharakah that result in a higher effective cost of capital. PLS arrangements are better suited for business ventures where there is a higher risk of loss. Profit and loss sharing refers to financing whereby parties enter into equity financing arrangements where the financier has a share ownership in the business.Furthermore, a stable business looking to finance their working capital might not want to dilute their ownership through equity financing. Stable businesses will not want to share their upside so would prefer debt-based financing. By doing so, they are happy to protect the financier from the downside and retain exclusivity to the upside. A PLS is favourable where there is greater risk of downside and therefore the business is happy to share the upside.
In the UK, the most direct and common way for a party to obtain working capital is to obtain an interest-bearing loan from a third-party finance provider. Since a conventional loan represents a purely monetary transaction—in essence, the use of money by a party in exchange for the payment of compensation based on the length of usage—this type of loan may not be given or received by Shariah-compliant investors. The Commodity Murabaha product allows Muslims to finance their working capital without being exposed to interest-based financing.
The Commodity Murabaha agreement has been conscripted to fill the void. A customer enters into a Commodity Murabaha transaction not to obtain a physical asset for its use, but to engage in a series of purchase and sale transactions that result in the customer obtaining working capital. In a basic Murabaha transaction, the customer receives assets in return for a deferred payment obligation, and then employs those assets in its business. In a Commodity Murabaha transaction, the customer takes the additional step of selling the assets to a third party for cash, which represents the working capital (or financing for an acquisition, as the case may be) required by the customer. Note that the customer would not necessarily be required to sell the Assets to a third party; it merely is allowed to do so, as owner of the assets. The sale of the assets to a third party is not an element required to make the Commodity Murabaha transaction a valid transaction under Shariah.
To ensure that this product is not a smokescreen for Riba (usury/interest), contemporary Shariah scholars have placed several controls. The AAOIFI Shariah Standard highlights these controls to ensure that Commodity Murabaha aligns with the principles of the classical jurists. These controls are as follows:
- Different brokers: The trades must involve the market and involve different brokers from the buy and sell side. This ensures that the trades are genuine and that the brokers are selling/buying the asset with an interest in the asset.
- Real asset :The trades must involve a real asset. A fictitious product cannot be sold. The asset transaction must impact the inventory of the seller and the eventual buyer.
- Real trades: All the Shariah requirements for trading must be met in terms of valid offer, acceptance, legal capacities of the parties, agreement on the commodity, agreement on price etc.
- True ownership: The traders should assume true ownership through true sales of the underlying commodity.
- Possession: The traders must assume possession; either physically, constructively or digitally. This possession must allow them to dispose of the asset or redeem the asset.
- Correct Sequence: The Commodity Murabaha must be performed in a correct sequence which further establishes and validates all of the above key elements.
- Discretion to not sell: The traders must have the discretion to not sell and hold. This ensures that the trade is not fictitious.
- Different agents: The financier should not be the sole agent for all the parties involved in the Commodity Murabaha.
By meeting the above principles, the Commodity Murabaha is a Shariah compliant, asset-backed financing mechanism which aligns with the principles of Islamic Finance. From a micro-economic perspective and for a Muslim minority in the UK context, this product provides a valid Shariah compliant alternative in a system where every corner and every offer are interest-based. An overview of the Commodity Murabaha facility used by Qardus for SME business financing can be found here.
You can contact Mufti Faraz Adam on sharia@qardus.com
[1] Uthmani, M.T. (1998), Buhuth Fi Qadhayah Fiqhiyyah Mu’asarah. Dar al-Qalam
WHAT IS A VENTURE CAPITAL TRUST?
A venture capital trust (VCT) is essentially an investment company. In the UK the government introduced VCTs in 1995 as a way of ensuring that investors could invest in start-up companies. The government was keen to encourage investment in entrepreneurial businesses by offering tax relief to investors. Recently there has been discussion and debate about whether VCTs are halal or haram.
For new businesses, VCTs are a great way of raising investment, and for investors they are an opportunity to invest in upcoming businesses.
For anyone looking for Sharia compliant investing, VCTs can be a good opportunity to invest in a halal way. Investing in VCTs can be halal, but you have to ensure that the VCT you invest in complies with Sharia rules about investment and financial transactions.
In recent years, as the Islamic finance market has expanded so too has the desire for Sharia compliant VCTs. The Islamic VCT market is innovative and presents a viable alternative to conventional investment models which are not always acceptable to Muslims who want to invest in line with Sharia rules.
Whilst it is always a personal choice as to where investors want to invest, for Muslims there are additional considerations that require them to be mindful of Islamic laws.
Let's have a look at how VCTs work and how they can operate in a halal way.
HOW DO VENTURE CAPITAL TRUSTS WORK?
VCTs work by raising money and then using the funds to invest in new and innovative companies. Usually these companies are innovative and privately owned. The idea is that the investment raised is then used to generate a profit and solid return for the investment.
The company can be dealing in products and services, offering employment opportunities, and/or meeting a need in the economy. The number of companies seeking investment is never-ending.
As an investor in a VCT, the investor becomes a shareholder of the trust. It is important to note that the investor does not become a shareholder of each individual company, rather the investor becomes a shareholder of the trust in its entirety.
Most VCTs will invest in different companies. This enables the VCT to keep its investment portfolio options diverse and spreads the risk. It is always important to ensure you have all the information you need about the VCT before investing.
When the companies within the trust return a profit, this is paid over to the shareholders.
WHAT DO VENTURE CAPITAL TRUSTS INVEST IN?
Most VCTs will invest in new, small, and entrepreneurial companies across a wide variety of sectors. These can include tech companies, retail, clothing brands, food outlets and many more.
Many of these companies will be privately owned, and some of them are quoted on the Alternative Investment Market or the London Stock Exchange.
Different Types Of Venture Capital Trusts
There are some different types of VCTs. What differentiates them from each other is the investment focus and area:
- specialist VCTs : these are VCTs that remain focused on a specific interest and sector. For example, there are VCTs that only invest in healthcare, or retail. Due to the lack of choice and sector diversification, this often means that they can carry more risk.
- Generalist VCTs : these types of VCT are wide-ranging when it comes to investment. They invest in companies across different sectors. The value to the investor is that there is diversification and less risk.
- AIM VCTs : the Alternative Index Market (AIM) VCTs invest in shares issued by AIM quoted companies. The AIM was set up by the London Stock Exchange in 1995 to ensure that there was a market for companies who can't (or won't) meet the demanding requirements for listing on the London Stock Exchange.
Venture Capital Trusts And Tax Advantages
One of the main reasons VCTs are popular is that they offer tax incentives. Investors can take advantage of:
- tax free dividends
- up to 30% income tax relief
- tax free growth
- capital gains tax exemptions and deferrals
WHAT IS VENTURE CAPITAL TRUST TAX RELIEF?
VCT tax relief can be claimed when an income tax return is filed with HMRC.
What this means for investors is that they can end up with a lower income tax bill, or even a refund if they have already paid their tax.
Islamic Finance And Venture Capital Trusts
Remember, one of the most critical elements of ensuring compliance with Sharia law when investing in venture capital trusts is that you need to work with a Sharia aware, and Sharia compliant, financial advisor.
This will ensure that the investment contract AND investment models are both compliant with Islamic finance rules.
Islamic Venture Capital Trusts Vs Conventional Capital Trusts
The main difference between conventional VCTs and Islamic VCTs is that Islamic VCTs must comply with Islamic finance rules relating to finance and financial transactions.
Islamic VCTs need to stay away from any form of investment in non-permissible, or haram, industries.
A very simple example of this would be as follows: a conventional VCT could invest in brewery shares. However, an Islamic VCT should stay away from any alcohol related industry.
Going further, anyone looking to invest in Sharia compliant VCTs should do additional due diligence and ask questions about the company they invest in. Does it operate ethically? Does it have conventional debts on its book that is interest-based? If so, then the VCT is not considered to be halal.
Advantages Of Investing In Venture Capital Trusts For Muslims
As long as the VCT is Sharia compliant, Muslim investors offer a diverse range of investment options. Muslim investors can take advantage of investing in other Muslim businesses and industries.
There are numerous ethical investment opportunities with halal VCTs that are attractive to Muslims. Socially responsible investing is a core principle of Islamic finance and there are VCTs out there that are ethical and socially responsible.
Halal VCTs also offer the potential for job creation with early stage companies. Supporting these businesses mean Muslims can indirectly be helping struggling economies and economic development. This aligns with the Islamic finance principles that relate to promoting economic wellbeing and financial inclusion.
WHAT IS WAKALA?
Wakala is a popular model Islamic VCTs when it comes to raising capital.
Wakala permits the asset manager of the trust (on behalf of the investor) to act on their behalf based on agreed conditions and terms.
Both parties then share the profits generated, and take on the risk of any losses together. This kind of profit and loss sharing arrangement aligns with Islamic finance principles.
Mudaraba And Venture Capital Trusts
When it comes to investing in start up companies, mudaraba is a common model that is used. The mudaraba contract is a contract that enables one party to the contract to bring assets in and for the other party to bring in effort and experience.
This means that investor provides the financing, and the entrepreneur takes responsibility for the day to day management of the trust. The contract outlines the respective responsibilities of each party and the profit sharing arrangement.
As already mentioned, despite the many advantages of halal VCTs, investors need to work with Sharia compliant advisors who can direct them to halal VCTs.
Consulting with knowledgeable advisors means you have specific guidance and adherence to Sharia rules.
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