Your business requires capital to grow. But you don’t want to go against Islamic law as you look to get hold of that capital. So exactly how can you do this?
In this article, we’ll outline three main sources of capital available in the UK today. They include:
- Venture Capital Funds
- Private Equity
1. Venture Capital
VC is a type of equity financing for early-stage companies that are deemed to have the potential for major, long-term scalable growth.
You receive funding from a specialist VC fund, but can also get it at earlier stages from angel investors. You’ll raise finance from them through selling shares. They will make their money in different ways, including on exit though an IPO, merger or acquisition.
It’s an incredibly high-risk but high reward investing strategy.
An advantage of VC is that they can provide expertise – managerial or technical. They’ll also have a network for you to tap in. It’s also sometimes more equitable than debt financing as the capital doesn’t have to be paid back if there’s a failure.
However, it does come at a cost – you’ll lose some control of the business. The investors can take large equity positions in exchange and request to have a representative on the board.
For an entrepreneur, VC is a vital source of funding. It’s popular among new technology companies with limited operating history which can’t raise via debt.
How is it halal?
Most VC funding is fundamentally sharia compliant.
However, there are a few terms to watch out for, such as preference shares and preferred return.
Where can you get VC funding?
A quick search and you find hundreds of places that provide funding.
If you’re an investor trying to make money or you’re a startup looking for funding, the easiest place to go is the IFG Angel Syndicate. We focus on tier-one deals and only invest in sharia-compliant and ethical start-ups. Another way to invest is through Venture Capital Trusts (VCTs). But you will in practice have to make sure they are investing in only halal startups, which is practically quite tricky.
IFG.VC is a pre-seed, seed outfit. This kind of capital is suitable for only certain types of early-stage company – typically with high margins, technology-based and looking to grow aggressively. If you want to make more sense of this, see our completely free Ultimate Startup Course for more details.
2. Private Equity
PE is direct equity investing for SME businesses by funds and investors. The capital is supplied by both institutional and retail investors.
It differs from VC as PE firms will mostly buy companies that are already established and purchase a large stake, even up to 100%.
PE is an alternative investment class – meaning it does not fall into one of the conventional investment categories e.g., stocks, bonds and cash.
We have a detailed explanation here of how PE operates in our article about the Asda takeover, which used the leveraged buyout (“LBO”) strategy. This is where the majority of the money used to buy or invest in a business is borrowed.
Sadly, there’s not much halal PE funding out there right now. However, we at IFG will be working to try to bring something like this to market in the coming years – or support others who are doing this.
Conventional debt financing involves borrowing money and paying back the capital with interest. This is clearly haram.
However, there are several ways to raise halal debt financing.
Halal debt funding
Qardus, which we have a full review of here, provides halal debt financing. They are an ethical, Islamic, equity crowdfunding platform, where you can invest in an unlisted company (a company that is not listed on a stock market) in exchange for shares in that company.
They offer financing to SMEs across the UK. This comes as secured and unsecured, with an average ticket size up to £100k and terms of up to 24 months. They have plans to offer asset financing for a longer duration.
The investments on Qardus are shares in a Special Purpose Vehicle (SPV). It’s structured via a Commodity Murabaha structure and is approved by most leading scholars.
There are also others now coming online, such as Izdihar. They are still to launch but will provide a sharia-compliant equivalent to Clearbanc.
As we mentioned, Qardus is a method of crowdfunding. We have a detailed article on crowdfunding here.
Property debt investing
For property debt, there is Al-Rayan, Gatehouse and OFFA. But they’re a bit picky about what they go for.
In Britain, the murabaha structure is sometimes seen in a buy-to-let scenario, in commercial property development financings, and in bridge financing situations. Under a murabaha structure, the Islamic bank will purchase a property on your behalf, and then sell you the same property at a marked-up price.
See our article UK Banks That Offer Islamic Mortgages for further information on who does/does not offer Islamic mortgages.
Asset-based financing is sharia-compliant too – so that’s perfectly legitimate to opt for.
A leaseback is a type of arrangement where the company that sells an asset can lease back that same asset from the purchaser.
A recent example of the leaseback method is the Issa brothers. Reportedly they will use this method to raise £1 billion through the sale of Asda’s distribution centres, which will then be leased back. You can read our article on the Asda takeover here.
(N.B. leasebacks can be structured in haram ways too – so make sure you talk to a mufti or expert if you do go down this route).
It’s important you finance your business in a halal way. We’ve provided several ways for you to do this.
VC is great as it provides you with a huge amount of capital that you don’t have to worry about paying back. We at IFG offer a place for you to receive this at IFG.VC. However this is not right for most businesses.
Qardus is also a great place for halal debt financing for SME businesses. This is usually more appropriate for financially-strong bricks-and-mortar businesses like pharmacies, dentists, factories etc.
PE is a bit trickier, but we are working on something to bring to the Muslim market.
We didn’t touch much upon it here, but crowdfunding is another great way to raise money – see our article – What is Crowdfunding & How to Make Money With It.
As always, we are here to help. Ask any question in the comments, our forum or in our telegram groups.