Cashflow Planning for Your Business

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.

WHAT IS QARD AL-HASSAN?

Qard al-hassan, also known as qard al-hasan, is an Islamic finance term that essentially refers to a loan that is interest free. Typically in a transaction that includes qard al-hassan, the borrower will repay the amount owing under the principal amount without any other mark up or interest payment being charged. Qard al-hassan financial products are compliant with Sharia rules that dictate that interest (riba) payments are not permissible, whether the interest is being paid or being charged.

These types of loans offer financial solutions for Muslims looking to borrow funds that do not include any interest payments.

Qard al-hassan loans are loans that are provided to help others. The word hassan itself means acceptable or good (of good faith). Islamic banking services are now offering qard al-hassan loans for both Muslims and non-Muslims.

Qard Al-Hassan Loans

In Islam and Islamic banking, Qard al-hasan loans do not have an interest rate element, and this means that businesses and consumers are able to borrow money on a goodwill basis. Generally speaking, qard al-hasan loans tend to be used for welfare purposes. The Quran stipulates that Muslims should endeavour to provide these types of benevolent loans where possible and to those who need these kinds of services.

"Establish regular prayer and give regular charity and give Allah Qard Hassan" (Quran 73:20)

The principle of qard al-hassan in Islam enables Muslims to further the social justice ethos that underpins Islamic finance. Islamic finance facilitates loans from those with the funds to those who need financial assistance without breaching Sharia rules. Qard al-hassan can be viewed as a loan agreement that is akin to giving charity. The borrower and lender sign an agreement confirming the terms of the qard.

HOW DOES QARD AL-HASSAN WORK?
In Islam, qard al-hassan works in the following way. A lender will lend a business or service an amount of money that they need (usually for social justice purposes). The principal amount borrowed will be interest-free. The borrower will then repay the amount of money borrowed without any interest or surplus payments owing. Borrowers are permitted to pay an additional amount back to the lender as a gesture of goodwill, but this cannot be done based on any promise or commitment.

Qard al-hassan loans do not increase over time or accumulate any interest charges like traditional loans do. This means they offer problem solving solutions for Muslims.

The most important element of Islamic qard al-hasan loans is that they are untouched by any form of riba. There should not be any reference or link to the economic market conditions and fluctuations, and the lender cannot ask for the return of the loan before the contractual repayment period ends.

Qard Al-Hassan - The Redistribution Of Wealth

Islamic finance systems focus on socio-economic justice and the enhanced wellbeing of society, especially the alleviation of poverty. Alongside sadaqa and zakat, qard al-hassan is an essential Islamic finance instrument of redistribution of wealth.

Qard al-hassan minimises the cost of borrowing and remains compliant with Islamic Sharia law. It's one of several halal investing principles that guide how Muslims manage and grow wealth ethically.

Social Justice, Qard And The Islamic Finance Economic System

The Islamic finance economic system has always centred on principles of social justice (as mirrored throughout the practices and teachings of Islam). The focus of the finance system is to ensure and improve the overall wellbeing of society and using money to enhance social conditions.

Qard al-hassan is a key concept that acts as a crucial redistributive instrument. The distribution of funds from the rich to the poor aims to reinforce social unity and cooperation. As the global experience of, and appetite for, ethical finance options and factor analysis continues to grow, qard al-hassan is fast emerging as an important tool in the fight against poverty and the drive to ensure there is more financial freedom and equity for poorer communities.

As more and more Islamic finance companies and banks are offering innovative qard al-hassan products and financial services, project management for those customers and business operations working within the social justice sector will become easier and more accessible. Qard al-hassan services will start to become more readily available in banking and private sector financial industries.

The opinion of scholars is that qard al-hassan loans are problem solving as they facilitate the redistribution of funds that are compliant with ethical and Islamic finance principles. Islamic finance is facilitating financial freedom and investment options for those who have historically been excluded from traditional financial markets and industries that did not cater to their religious requirements.

According to Sharia law, qard al-hassan loans are deemed to be acts of good faith, and loans that help those in need. Advancement of news relating to qard products and websites, and information technology means that qard al-hassan financial services are more readily available and searched for online, especially in Middle Eastern territories. This has enhanced the supply and demand of qard services. Historically, qard al-hassan loans have proved to be effective for economic growth, enhancing employment, and alleviating poverty.

Starting a new business requires an investment of time, energy, commitment, and money. For any small business or startup company, the financial investment is what converts the original concept and elevates into a running business. However, securing the required finance to get your startup off the ground can be difficult, especially when the venture capital market is unpredictable or saturated. Funding is central to ensuring that the business can begin its operations, and it has the cash flow to pay for wages, suppliers, and equipment.

Money can often be one of the main limiting factors that prevent businesses from getting off the ground or launching properly. Many business beginners will not have access to the financial sums needed to build and expand their business. An injection of cash into the business means that it can start earning more quickly, and any profits can be reinvested into the business, thereby facilitating growth and profits.

Startup Businesses

Startup businesses can face many challenges when launching. Money can often be a barrier for new startups that can become overwhelmed with the costs of starting a business from scratch. Businesses that are new also find it difficult to attract investors or equity investments from private investors as they have no track record showing their performance levels.

New startups and small businesses may also find it difficult to raise funds via loans in the traditional financing route. Banks want to have a lot of information to support any application for funding, and many of them are more risk averse when it comes to small businesses and startups. This means that unless these businesses have personal savings to use, they can find it difficult to launch their business.

Sources Of Business Funding

Whilst there are some different options out there for those looking for startup funding, it is important to note that funding is dependent on many different factors. These can include the following:

• The strength of your idea
• The level of market research you have undertaken
• Leadership and their business ethos
• Early traction and users of your business
• Good advisors

Once you have a unique idea with a clear target market, and have considered all the points above and worked to strengthen them, you should be in a position to look for funding sources. Government statistics show that UK startups raised almost £2 billion of funding in 2021.Some common sources of business investment include the following:

• Banks
• Government lending schemes
• Grants
• Equity finance
• Angel investors
• Venture capitalists
• Business Partners
• Friends and family
• Savings

Let's have a look at the above in a little more detail.

BANKS

Commercial lenders have always been one of the more traditional routes to securing funding for businesses. Bank loans are an effective way of securing money and come with repayment terms you are familiar with. However, banks will always require some form of security and this can be prohibitive for new startups and smaller businesses who lack the security banks might require.

Securing financing through banks is far easier for established businesses than it is for new and startup companies, especially in unpredictable economic markets such as the one we have seen since the Covid-19 pandemic. This is one of the main reasons startups tend to look at alternative funding sources for their ideas.

GOVERNMENT LENDING SCHEMES

Government lending schemes are usually run in collaboration with banks and commercial lenders. You can find schemes that offer a percentage of the funding with the banks meeting the remaining funding required. Government lending schemes are a great source of funding as the terms are often far less stringent than those normally associated with commercial banks. The loan amounts for government schemes can vary depending on the type of business so always make sure you read the information carefully before you make an application.

GRANTS

Grants from the United Kingdom government tend not to be repayable but you should always check to see what the terms and conditions state. Grants are a great source of funding for small businesses as they can provide an essential cash injection. However, remember that grants usually require a detailed application that needs supporting information, and you need to be able to provide the information as quickly as accurately as you can. Grants are competitive and fiercely fought over so always make sure your application is the best it can be. You should also check to make sure that the grant does not require you to hand over any shares in your businesses, and what the time frame for using the money is.

EQUITY FINANCE
Equity financing refers to an arrangement whereby an investor invests in your business and in return they are given equity/ shares in the business. If the business makes profits, then these profits are shared in accordance with the equity arrangements, and if the business fails then there is no return of the funds to the shareholders who invested. It sounds simple, and in practice it is a simple give and take relationship. However, it can be difficult to find the right equity investor for your business.
ANGEL INVESTORS

Angel Investors are usually wealthy investors who have the funds to provide to small or startup businesses in return for business equity, or shares. Angel investors tend to use their own net worth in order to fund projects in a private equity type arrangement. Angel investors tend to invest their finances in smaller or startup businesses for minority stakes, rather than investing in large businesses where their financial impact is lessened. They also typically invest their experience and knowledge in the business to enhance its success and are usually involved in multiple ventures at the same time.
VENTURE CAPITALISTS Venture capitalists tend to favour larger businesses with high growth predictions. In return for their investment, they receive an equity stake. Unlike angel investors, venture capitalists do not use their own personal funds, but instead they use an investment fund to finance projects and businesses. Venture capitalists focus their investment within industries such as technology, life sciences, and digital media.

BUSINESS PARTNERS

Having a business partner is a smart idea for any new startup. Not only does it mean that you have a partner to share ideas and concepts with. It also means that you have support when it comes to financing, operating and managing the business. Many business partners have a finance background and provide analysis and support to the business, becoming a trusted advisor. For a successful business partnership, you need to have a mutual vision for the business, commonality, and compatibility.
FRIENDS AND FAMILY

Although this may seem like an easy and obvious funding option, using friends and family as a source of investment can be problematic. Unlike borrowing from a bank, taking money from friends and family does come with a lot of additional stress and pressure. However, if you do have friends and family that believe in your business vision and want to invest this can be a good source of raising money quickly. Of course, with new ways of network funding such as crowdfunding and patreon, there are different ways of using your own networks to secure funds.
SAVINGS

Many new entrepreneurs struggle to secure funding and dip into their own savings. This can be risky as there is no guarantee that your business will succeed and you will recover your savings. Using savings might be one of the easiest ways to finance your business, however you may not have all the funding you actually need. Also, the UK business industry is heavily regulated so it is not simply a case of putting your savings in and being able to take them out when you want. Business laws, regulations and guidelines dictate how business finance operates so make sure you have this knowledge before investing your own savings.

What To Do Before Seeking Funding

These are the steps you need to take before you seek our funding options and sources:

1. Business plan - make sure your business plan is robust and refined. It should include a summary, a pitch, forecasts, income and expenditure predictions, business process, scalability, market research and strategic management strategies, and projections.
2. Accountant - it is essential that you have a good accountant on board so that your financial planning and business service economics planning is robust and considered. A good accountant will help you throughout your business's growth and can provide you with important information about the valuation of your business, taxes, and financial obligations.
3. Credit scores - check your scores and improve them if you need to. In fact you should get all your personal finances in order.
4. Consider the range of financing options available to you and narrow down the ones that apply to your business.
5. Perfect pitching - prepare your pitch and practice it. Remember, if you don't know your business inside out then it is likely that any potential investor could lose interest. Your pitch does not have to focus on sales or products, but it must be convincing and provide real time information.
6. Create a website and start networking and sharing your ideas on various platforms, sharing and gathering data, and building momentum for your idea. Your first customers will probably come from word of mouth or networking so get to work as soon as you can.