Cashflow. You can’t have a conversation about financial constraints in any small business without mentioning it. In fact, you can’t have a conversation about business without mentioning cashflow.

The latest research indicates that 93 per cent of businesses say cashflow is one of their top three priorities and the issues surrounding it don’t start and end with simply not having money available. There are several knock-on effects that stunt small business growth.

The large majority of entrepreneurs are scared of big contracts for fear of them causing major cashflow issues, and more than two thirds say managing day-to-day business finances completely distracts them from growing their business.

‘93% of businesses say cashflow is one of their top three priorities’

These would have been worrying statements a few years ago, but as the world tries to avoid a financial crisis and the cost of living crisis continues to put a major strain on people’s pockets, they’re a major concern.

>See also: SMEs urged to apply for finance before it’s too late

Small business owners can and need to address the issue surrounding cashflow. Fortunately, there are three simple steps businesses can implement that will have an immediate effect.

#1 – Understand cashflow

You can’t go into this blind. The first step you must take is to have full oversight of your cashflow. You need to understand when money is coming in and when you’re expecting money to go out. There are so many tools available now to provide that oversight, using the powers of open banking to get immediate clarity on cashflow.

Cashflow visibility isn’t just about the need to understand your immediate issues. Use cashflow forecasting to see where you’ll have gaps in cashflow in three, six, 12 months from now. It may be difficult to focus on the fires you’re going to have to put out in six months’ time, but pre-planning is crucial if you’re to ever escape the constant cycle of keeping up with cashflow.

But, of course, there’s no point in having full oversight of if there is no solution. This can be addressed through the next two steps.

#2 – Shrink the gaps

Once you understand where your cashflow issues are, you can then prepare for the gaps. There are some initial ways of doing so. Address the following questions:

• Are you able to delay payments?
• Can you bring some of your clients’ invoices forward?
• Have you invoiced all of your clients promptly?
• Are you able upsell, cross-sell or raise prices anywhere?
• Can you accept credit cards?

Go through every element of your business and spot where you can apply these questions. They seem simple and you’re probably focused on most of them on a weekly – if not daily – basis, but they are essential if you’re to strategically overcome cashflow problems.

The next weapon in your arsenal is a very simple way to plug cashflow gaps.

#3 – Plug the gaps

Where there are sizeable gaps between payments to suppliers due and invoices being paid, step two won’t cut it. You need the money you’re expecting in a couple of months (and that’s if the client pays on time) to land in your account now.

The way to flatten out the bumps in the road at this stage in your journey is invoice financing. It’s been around since cashflow problems began but it’s been somewhat underused (or overused, which has caused some fairly negative opinions to develop at the mention of it).

>See also: Small businesses using loans to manage cashflow, instead of investing

Despite people’s hesitations, it is the answer to the cashflow problem. It allows business owners to have a stable bridge in place over a big dip in cashflow and, in many cases, helps businesses to survive their early days.

Going back to some of the statistics mentioned earlier, it doesn’t just solve cashflow issues, but it empowers business owners to grow with confidence, accept big contracts and stop worrying about something as simple as when money is coming in. 

It also enables business owners to pay their suppliers on time, which could create an environment that better lends itself to support innovation and sustainable business growth.

The drive and determination of founders and entrepreneurs to solve problems is something to be admired. But they also need a simple solution to this ever-present issue. Through this three-step process, founders can build the business they need and want without getting stuck in the weeds.

Simon Draper is co-founder of SME cashflow analytics platform Monspire

Further reading

Government to launch £3bn recovery loan scheme

The post 3 ways to improve your small business cashflow appeared first on Small Business UK.

Stock is essential for your business, but you’ll likely have different needs at different times of year in line with cash flow and demand for certain items of stock.

At other times, you’ll want to take advantage of a deal, think sell-out products or discounts, and need a bit of extra dosh.

Here, we go over a few different financing options for stock to help you suss out which is the best for your small business.

Business loans

Entrepreneurs often turn to business loans when they need cash for stock and it’s more for new stock or to maintain buffer stock. A fixed term loan is best as they have lower interest payments. What’s more, repayments can be made between one month and several years.

“When buying stock, it’s crucial that businesses react swiftly to changes in the market, so the shorter approval time of short-term loans can prove useful,” Joost Versteeg, head of product strategy at small business lender iwoca, tells Small Business. “Better still, the best short-term loans do not lock borrowers into payments, meaning that if your business sees high revenue and you can afford to pay off a loan sooner than expected, there’s no small print forcing you to continue paying instalments over a long period – or pay a fee to settle up early.”

Pros

• Short-term loans allow businesses to act quickly
• A range of repayment periods
• Plenty of options available

Cons

• Some loans are only open to more established businesses
• Likely to require a credit check
• Applications can take longer than other financing methods

Credit facilities

The difference between loans and credit facilities is that when borrowing from a credit facility, businesses have flexibility in when cash is drawn and repaid, and borrowers don’t need to submit multiple applications to receive long-term funding. “That is to say, when small businesses need to act quickly, such as when buying stock to react to market volatility, a pot of money with a credit limit is readily available to them – no further applications needed,” said Versteeg.

Credit facilities are better for small businesses who have unpredictable cash flow. Borrowers pay interest only when they draw from the facility, instead of a regular standing payment like you’d see on a personal loan.

Pros

• Only need to apply once
• More flexibility
• Suitable for less stable cash flow

Cons

• High interest rate charges
• Terms can change at any time
• A number of fees on top of interest

Revenue-based finance

Revenue-based finance gives companies capital in exchange for a percentage of their future revenue. Advances are approved on the proviso that the company will repay a certain amount each month.

Merchant cash advances

Merchant cash advances are popular for retail, hospitality and leisure businesses. You as a business will pay back as a percentage of card payments through a card terminal. It can be easier to access than other forms of finance making them useful for businesses who have few to no assets. They’re also good for those who need capital for growth and have a limited credit score as there’s no need for a credit check or detailed look into your bank accounts.

How it works is that the lender liaises with your terminal provider to determine repayments based on your takings. Basically, it flexes to how much money you’re making. This means you pay back less if you’ve had something of a quieter month. How much you can borrow will depend on a few factors, such as your average turnover.

Versteeg said that the best products use open banking technology to use your business’ bank transaction data, instead of just card transactions, thus accounting for the multiple revenue streams you may have. This will be particularly useful if you sell online on multiple platforms. 

“The revenue-based loan also offers flexibility to businesses affected by continued economic uncertainty, with supply chain and staffing issues making it difficult for businesses to plan. Moreover, it can drive growth for scale-ups whose revenue growth may come months after finance is secured,” he added. 

Pros

• Easier to access than other financing options
• No credit check
• Pay back less if you have a quieter period

Cons

• Difficult if majority of payments aren’t taken using a card terminal
• If you don’t get much revenue, you won’t be able to borrow as much
• Unsuitable for pre-revenue businesses

Credit cards

Credit cards can be beneficial for newer businesses as they can get a credit history which could give them a leg up for future financing.  

You’re likely to have a credit card fee but some providers dish out rewards like cashback. Make your minimum repayments to avoid additional fees as well as damage to your credit rating. It can be flexible too, with the option to switch your balance to a new credit card or have a balance on multiple cards. Be aware that there are different rates and limits on different credit cards.

Credit cards are a method of unsecured lending, so you’ll have to make sure your business is trustworthy. In other words, get ready for a hefty credit check.  

Pros

• Easy to access with lots of options
• Rewards on some cards
• Build business credit

Cons

• Multiple fees
• Difficult for unpredictable cash flow as need to make repayments
• Need a personal guarantee, so can affect credit score if you miss a repayment

Stock finance/inventory finance

Stock finance is an alternative finance method which is not as well-known. It’s good for paying suppliers for stock. It’s flexible, giving quick payments to supplier and allowing you to buy larger quantities of goods. A funding limit can be set and you can purchase goods up to this limit at your own discretion. In order to access this finance you’ll need accounts, forecasts, stock inventory and customer records. Read more on our sister website, Growth Business.

Stock loans

Stock loans are for businesses who need to pay their suppliers directly. This can be for goods regulation, clients needing to pay for goods on the spot (say, at an auction) or preserve long-standing client relationships.

You can also take out loans against existing stock as long as the stock is saleable. The stock needs to be in a position where it can be inspected and it’s expected to be sold within a relatively short time – two months, for example.

Pros

• Pay suppliers directly and quickly
• More likely to be open to new businesses
• Businesses don’t need to put up personal assets to access finance

Cons

• Need a lot of documentation to set up
• Admin is costly for the lender which is passed on to the borrower in fees
• Lenders may not advance all of the money requested

Wholesale stock finance

Wholesale stock finance is more for larger companies. It allows you to raise working capital against the stock owned by your business via a revolving credit facility.

Wholesale stock finance provides convenient access to a credit line throughout your operating cycle. It offers the reassurance of certainty of funding up to an agreed limit.

Pros

• Flexible

Cons

• More suited to larger businesses
• Can be more expensive than traditional loans

Revolving credit

With revolving credit you can borrow money, pay it back and take it out again for the agreed period of the revolving credit limit’s term. Get credit up to a set limit – once paid back in full, the money can be borrowed again. You’ll only pay interest on what is used.

Pros

• Pay interest only when you use it
• Access finance quickly
• No early repayment fees

Cons

• Lower credit limit, so not practical for a larger loan
• A personal guarantee may be required
• Higher interest compared to traditional loans

Inventory monetisation

This is a relatively new concept to the UK, but inventory monetisation allows companies to unlock working capital based on the value of their inventory without incurring debt.  

Nicola Bonini is the head of origination at Supply@Me, which facilitates the selling of non-perishable goods to an inventory lender, such as a bank, and sells it back at a later date.

They’ll do this through a rigorous due diligence process, looking at your sales history of that inventory, how the inventory has performed, how it’s turned, how often it’s sold and how often it comes in and out of the warehouse.   

She uses the example of tinned tomatoes. They are canned at a certain point in time and then they are shipped over to the UK to sit in a warehouse, but the supermarket, for instance, doesn’t want all those cans of tomatoes in one go. Your business can then allow the corporate to get the value out of that stock before it’s sold on to the third party.

“We will be covered by [your company’s] insurance policy. We make sure that we’ve got all the right requirements in place for us to be able to access that inventory if we needed to,” she told Small Business.

“It’s really pertinent at the moment with all the supply chain issues and the movement away from ‘just in time’ to ‘just in case’,” she said. “Then there’s Brexit – a lot of businesses have decided that they need to have warehouses in Europe now whereas previously they might not have done.”

Pros

• Unlock working capital without incurring debt
• Supports businesses with warehouses in other parts of the world
• Beneficial for businesses that sell seasonal goods

Cons

• Firm will need access to your warehouse if necessary
• Doesn’t cover stock with a short shelf-life
• Due diligence is rigorous

What should I consider when looking for finance options?

Joost Versteeg outlines what considerations you need to make when assessing your finance options.

Business needs

First, it’s important to assess what exactly your business needs. If a small business is looking to escape a cash flow crunch or to bridge a gap quickly, a short-term business loan should do the trick. Bear in mind that if your cash flow is unpredictable, you’ll need to find a loan that has no fees for repaying early and only charges you for each day that you hold the loan money. Short-term flexible business loans that allow you to repay early and top up for free, are often the best route for cash flow support, but consider that not all lenders provide these flexible options and you need to consider any additional fees. 

Flexibility

Flexibility is often the distinguishing feature between borrowing options. Small businesses, by their very nature, are more likely to experience variations in their cash flow than larger companies. Having the option of an easily accessible pot of funding in the form of a credit facility suits businesses that foresee needing money on short notice, but it’s important to note that while credit facilities offer flexible capital, their rates of interest can be, on average, higher than those of regular loans. 

Current resources

Finally, make sure that your chosen financing option is suited to your business’ current resources. Applying for funding with some providers can be long-winded and consume your resources. Double check with your funding provider on the:

• Speed of the decision: how quickly do you need the money? Depending on your provider and their products, you may be able to get your loan approved in just minutes or hours, but some providers may take longer.
• Administrative requirements: are you in a position to complete the required paperwork? Keep an eye out for providers that allow you to apply for your funding entirely online as it may save your time and resources.
• Management of your account once you’re a customer: will your lender offer you an account manager? It’s helpful to have a point of contact with your provider who looks exclusively at your account and supports you along the way.

Where can I go for more information on borrowing to finance stock?

Have a word with an Independent financial adviser (IFA) to go over which options are best for you.

Check out the links below for more about the topics in this article:

Best small business loans in the UK

Secured vs unsecured business loans

Business credit cards: how to use them for steady cash flow

The post Borrowing money to pay for stock: inventory finance, credit cards, loans and more appeared first on Small Business UK.

Pitalia Capital has launched a £50m equity fund to invest in small businesses across Britain.

The money will be used either to fund growth for early stage companies or to back management buyouts of mid-sized firms.

The fund can deploy up to £10m per transaction.

>See also: Forward Advances wants to lend £250m to small businesses by 2023

Pitalia Capital is part of the Pitalia group of companies and funded by entrepreneur Anil Pitalia.

John Davies, who has more than 20 years’ experience in venture capital, private equity and corporate finance, has been recruited from Seneca Partners as managing partner to spearhead this small business investment drive.

Davies was investment director at Seneca Partners for six years, where his deals included its exit from digital business communications specialist Mission Labs in a deal valued at £40m, giving Seneca a 4.2x return for investors.

>See also: How to win a £25,000 Business Boost grant for your small firm

He was also deeply involved in Seneca Partners’ investment in Manchester-based Wejo, the connected vehicle data company, which recently announced plans for a $1bn Nasdaq listing.

Davies said: “What makes Pitalia Capital different is our personal approach to investment. We want to back great people who share our values, and it’s as much about who they are as an individual as it is about the business they run.

“Whether an entrepreneur needs growth capital to bolster their early-stage company or requires funding to help a more established mid-sized business reach the next stage of its strategy, we’re building a team that will invest in and support management teams as they push forward with their own expansion plans.

“We don’t have the usual restrictions of typical private equity funds as we invest our own capital, not funds raised from third parties. That means we can back whoever we want, whatever their unique situation. We therefore have no external pressure to rush to deploy capital or to exit good investments – and this provides us with a far more flexible investment mentality.”

Further reading

150 UK small business grants to apply for right now – UPDATED

The post Pitalia Capital to invest £50m in small businesses appeared first on Small Business UK.

Despite the pandemic, the construction industry is growing at its fastest rate since 2014, according to the latest IHS Markit/CIPS Construction Purchasing Managers’ Index (PMI).

This trend is set to continue. Building works for both residential and commercial properties have continued throughout the last 12 months and more are in the pipeline as demand rises.

However, this surge in demand for construction services, alongside factors such as increased shipping costs, has left construction materials, including cement, some electrical components, timber, steel and paints, in short supply.

The Federation of Master Builders says this means some building companies may have to delay projects and others could close entirely.

Fortunately, there are lots of construction finance options out there to help affected firms manage their cash flow and pay suppliers and staff during this busy period.

What is construction finance?

Construction finance is a type of business finance designed for building contractors, sub-contractors and other companies operating in the construction industry.

Lack of funds can lead to delays which ripple down the supply chain. Construction finance provides businesses with the capital they need in order to fund their building projects.

Think of it as a kind of funding bridge: a solution to cover costs from when the building work begins to when the client pays upon completion.

For particularly large projects, such as the building of an entire block of flats or mixed use developments, it can take years for a construction company to get paid.

Without ready cash, companies struggle to buy more materials and pay the workers they need to get the job done – not to mention all the other construction-related expenses.

Flexibility at the core

It’s important for construction lenders to offer flexible repayment options so that firms borrowing funds can keep their construction sites running smoothly.

As there isn’t really such a thing as a set cost for building projects – every project is unique, etc. – the total amount one firm will need to borrow will vary from the next.

That’s why, when it comes to construction finance, there’s no such thing as one-size-fits-all. Finance options are tailored to each construction firm.

4 types of construction finance

Whether you’re in need of a secured loan to cover costs caused by a delay or want to lease a crane for your project, there are a range of construction finance options out there today.

1. Secured loans

When you take out a secured loan, the lender secures the funds against an asset your business owns. This could be a commercial property or a fleet of vehicles. If you don’t want to offer a personal guarantee, a secured loan could be a better option.

Bear in mind that because a secured loan is based on your assets, the loan value will be capped at the value of the business asset you’re using as security.

2. Unsecured loans

If your business doesn’t own many or any assets, an unsecured loan may be a more favorable option (or your only option, for that matter). As the name suggests, with an unsecured loan, you won’t have to offer a business asset as security for the funds.

3. Equipment leasing

In many cases it doesn’t always make sense for a construction company to purchase equipment outright. As well as being too expensive, it might not make sense from a business strategy standpoint.

Instead, many use equipment leasing as an effective way of leasing the machinery they need to complete the project. Equipment ranging for large items like diggers and cranes all the way down to drills can be rented for a set amount each month.

4. Invoice finance

If you rely on customers’ invoice payments for cash flow, you could take out invoice finance to help you cover outstanding project costs until your customers pay you. Invoice finance can be a useful option if you have customers with long payment terms.

It works by the lender advancing you the majority of the funds your debtor owes and then providing you with the rest when the customer pays, minus their own fee.

What can I use construction finance for?

You can use construction finance to fund the areas of your business that need it the most, whether it’s to hire additional staff, purchase more materials or to keep cash flowing through your business. Here are a few examples of what you might use the funds for:

• To pay suppliers/contractors prior to you receiving money from unpaid invoices
• To fund new construction projects
• To purchase more materials or buy/lease equipment
• To hire and pay new staff
• To boost overall cash flow

Funding Options works with a panel of over 120 lenders to support both the cash flow needs and growth of UK construction companies.

If you’re looking to secure funding for a project, see what you could be eligible for today. We’ll match you with the type of construction finance most suited to your goals.

CONSTRUCTION FINANCE – APPLY

Read more

Why late payment hits the construction sector hardest

The post Business finance options for UK construction firms appeared first on Small Business UK.

Forward Advances, the merchant cash advance provider, wants to provide £250m worth of cash to small businesses in the e-commerce space by 2023.

The lender, which set up in April 2020, is one of a new wave of small business funders base lending decisions based how much you are selling each month. In recent months Clearbanc and eBay have both launched their own versions of what’s known as merchant cash advance in Britain, while PayPal has been offering it for some time.

By tying its technology to your bank data, accounting software or social media ad accounts, a lender has a real-time view of your monthly income. This means repayments fluctuate as a percentage of income, rather than being a fixed amount each month like a bank.

>See also: One third of small businesses turn to Bank of Mum and Dad

Although well-established in America and in Sweden, where the concept originated, merchant cash advances are still a relatively new concept in Britain.

Hasam Silva, managing director of Forward Advances, said: “In the US merchant cash advance or revenue-based financing is a well-understood product but, in the UK, less so. Half of all founders I spoke to last year hadn’t even heard of the concept, which was a challenge.”

How Forward Advances works

To date, Forward Advances has lent money to around 50 small businesses with an average loan being £50,000.

One of the advantages of using open-banking technology is that lending decisions can be made within a couple of days.

Forward Advances can lend anything between £10,000 and £1m with the average repayment term between five or six months.

>See also: Qardus opens Islamic finance to small business for first time

The lender charges a fixed fee of 6 per cent for its service, with a revenue corridor of anything between 10 per cent and 30 per cent of monthly income.

To qualify, a small business must have at least six months of sales data and monthly income in excess of £10,000.

Although Forward Advances, which is an offshoot of seed venture capital fund Forward Capital, can lend to any sector, it specialises in e-commerce, marketplaces and B2C software-as-a-service (SaaS).

Its cash so far has come from parent company Forward Partners but it is close to signing a debt facility with an institutional lender, so that 80 per cent of its capacity going forward will come through institutional debt.

To date, the 50 small businesses which have drawn down Forward Advances cash have split the money equally between digital marketing and buying stock.

Silva points out that businesses that only spend on digital marketing and don’t have the inventory to fulfil sales are not serving the customer. Vice-versa and the stock sits on your shelves unsold.

As part of the offer, Forward Advances offers a free one-on-one session with a business mentor, up to three hours of advice, helping customers plan to grow their business and scale their e-commerce company.

Silva said: “We can provide support even if we don’t do day-to-day execution. Plus we can put our customers in touch with paid-social media advertising experts.”

In time, Forward Advances would like to have its own inhouse social media team who could help small business navigate, what is, the increasingly complex world of social media campaigns.

Silva said: “The value we add is making it more tailored and personalised for e-commerce than someone like PayPal.”

Silva shrugs off any talk about the death of the high street – all that’s happened is the high street has moved online.

And he’s not fazed by e-commerce giants like Amazon either.

The next era of the internet he says will be about providing much more intelligent, curating products for their target customers or a brand concentrating on doing a specific product really well, such as recent Start-Up Series winner – and Forward Advances customer – Bedfolk.

Further reading

Small businesses struggling to get credit from Recovery Loan Scheme

The post Forward Advances wants to lend £250m to small businesses by 2023 appeared first on Small Business UK.

Qardus, the first small business Islamic finance platform in the UK, hopes to arrange up to £2.5m worth of funding over the coming year.

The crowdfunding platform, which launched last July, offers sharia-compliant Islamic finance to any small business, whether it is Muslim-owned or not.

Muslim-owned SMEs are an underserved market in Britain, as they are forbidden to borrow money or pay interest under Sharia law yet still need to grow.

>See also: Sharia start-up funding boom as UK leads in Islamic finance

An estimated 3.3m Muslims live in Britain, many of whom need to grow their small businesses but are prohibited under Sharia from borrowing from high street banks. (The word “Sharia” means a well-trodden pathway to water, although in this case it means religious legislation.)

So far, Qardus has arranged nearly £320,000 worth of Islamic finance for five small business owners, including a property firm, a chemist and a dental practice.

Firms can arrange anything between £25,000 and £200,000, which they repay over up to 36 months.

Around 750 individual investors have signed up for the Qardus crowdfunding platform.

Just as Muslim-owned microbusinesses do not really have anywhere to turn for Sharia-compliant finance – most of the big Islamic finance banks only work with big-ticket property deals – so there are not many places that Muslim investors can place their money in a halal way.

Hassan Daher, founder of Qardus, said; “Because we are in such a low-interest environment, investors are seeking yields elsewhere. They like our returns and see us as offering a unique proposition and a separate asset class. Our product is attractive to non-Muslim investors as well.”

However, because Qardus cannot lend money per se, its unsecured finance works in a different way, known as murabaha.

Allowable under Sharia law, a Qardus SPV buys, say, £100,000 worth of a non-precious metal such as tin or steel, and then sells it to the small business for £120,000. Qardus then acts as the agent of the small business to immediately sell the non-precious metals and provide it with the funds. Out of this Qardus takes an upfront fee of up to 7 per cent and the £120,000 deferred payment is paid out by the small business to investors over the finance term.

From the business owner’s point of view, it appears to be an effortless – but crucially Sharia-compliant – finance facility once paperwork is signed. Money hits the SME’s bank account within a couple of days of the offer being fully funded.

Hassan Daher, founder of Qardus, said: “Islamic finance is a dense subject and more needs to be done to disseminate information in a way that’s easy to understand. We want to make the underlying essence of Islamic finance understood by any small business.”

Promote a social good

Crucially, Islamic finance can only be used by certain types of small business, ones which care for people or promote a social good.

Certain businesses are barred from Islamic finance, such as any involved with alcohol, pork, gambling or any other non-Islamic activity. This also includes mass entertainment such as music, cinema or TV shows.

However, Islamic finance is available to any small business with a social agenda – a coffee bar run by former homeless, for example, or a catering employment agency which only has former prisoners on its books – and its terms may be more attractive, say, than the new Recovery Loan Scheme, which charges interest at up to 15 per cent.

Daher said: “Our platform is open to SMEs that pass Sharia screening criteria, but they don’t have to be owned by Muslims. We feel that social impact is in our DNA. Social impact has to come before anything else. How can we give back to the community we’re serving?”

Indeed, Qardus has been talking to several non-Muslim-owned but socially progressive businesses.

Furthermore, Qardus feels that it can help microbusinesses to become more ethical and socially aware, as part of its service. Unlike enterprise-size companies, microbusinesses do not have time or resources to devote to social good or sustainability.

Perhaps unsurprisingly, Qardus is in talks with institutional investors, as socially conscious Islamic finance ticks many of the boxes when it comes to enterprise-size ESG commitments.

Qardus has been backed by early stage investors Founders Factory and SFC Capital. Daher developed the crowdfunding platform through the Founders Factory programme, having completed a PhD in Islamic finance in Malaysia, where half of the economy is run on a Sharia-compliant basis.

Further reading on Islamic finance for small business

Using Islamic finance for your SME – what is it?

The post Qardus opens Islamic finance to small business for first time appeared first on Small Business UK.

What is Islamic finance?

Islamic finance is a means of funding or banking money in a way that respects the principles of Sharia law, guided by Islamic economics. In Arabic, Sharia means the clear, well-trodden path to water. The fundamental principle of Islamic finance is to avoid any financial activities which could be deemed either harmful (Haram) or risky for the user.

The main difference between Islamic finance and standard finance is that charging interest in forbidden. Conventional banks and lending facilities earn money by charging fees and monthly interest charges for borrowers.

The principle features of Sharia-compliant finance are:

• A ban on what the Koran refers to as “riba” and we would call paying interest
• Sharing losses as well as profits

What is Sharia-compliant finance?

Sharia-compliant finance bans excessive risk or uncertainty, as well as restricting any form of gambling or speculation.

Businesses involved in the activities below cannot use Islamic finance:

• Alcohol
• Gambling
• Tobacco
• Pork
• Entertainment such as music, TV or cinema
• Pornography
• Arms sales

Do you have to be Muslim to use Islamic finance?

No, you do not have to be Muslim as long as your business is halal (allowed) or promotes a social good.

What kind of small business suits Islamic finance?

Islamic finance dictates that a business should provide some form of benefit to the community at large, rather than just making a profit.

Are there any advantages to Sharia-compliant funding?

When you get a loan from a conventional bank and things go wrong, the lender’s main priority is to recover its money, even if that means leaving the entrepreneur stranded. Islamic banks, on the other hand, are obliged to share in both the risks and the rewards.

>See also: 150 UK small business grants to apply for right now – UPDATED

What does Islamic finance mean in practice?

Musharaka

The most used instruments of Sharia-compliant funding are profit and loss sharing schemes (musharaka). The finance provider takes some ownership, or equity, in the business, allowing it to benefit to share in profits made. However, any losses are also shared in proportion to each partner’s investment capital.

Ijara

Another arrangement is ijara, which permits the financial institution to earn a profit by charging leasing rentals instead of lending money and earning interest.

Murabaha

A murabaha agreement is a form of Islamic finance contract, in which an asset is sold for cost plus profit. It is considered both halal (permitted) and Sharia-compliant.

A basic murabaha agreement gives the small business owner the resources they need to develop their business. These resources are assets they can put to work in the business, such as plant and machinery or inventory. Under a murabaha transaction, the financial institution is not permitted to charge interest on finance. Instead, the provider simply purchases an asset of the business and then sells the asset back to the business owner, along with a single additional charge. This single fixed fee is, of course, pre-agreed between both lender and entrepreneur.

If a small business defaults on repayments, late payment charges are allowed. However, the financial institution must distribute the amount of any late payment charges received by it — after deduction of its actual costs — to any charitable foundations that may be selected at the discretion of the Sharia Supervisory Board.

What are the drawbacks of Islamic finance?

With some financial aspects of Shariah law open to interpretation, some instruments may be offered by some institutions, but not by others.

Some non-Muslim clients could also find that conditions imposed by Islamic banks prevent them from taking advantage of immediate opportunities. This is because speculation or taking advantage of short-term market trends is outlawed, which gives the Islamic banking sector greater stability, but also slows the pace of product innovation.

Where can I find Islamic finance in the UK?

The UK has led the way in Islamic finance, allowing the creation and implementation of several pure Islamic banks including:

Al Rayan Bank

Bank of London and Middle East

Gatehouse

Furthermore, several UK mainstream banks have opened Islamic windows, including Barclays, Lloyds and HSBC.

And last July, Qardus, a crowdfunding platform for Islamic finance, launched for small business. Qardus hopes to arrange between £2m and £2.5m worth of Islamic finance over the coming year.

Is Islamic finance regulated?

The UK has adapted pre-existing legislation to accommodate structures commonly used in Islamic finance. Rules governing Sharia-compliant funding products and services are set out in the Finance Act 2005, amended by the Finance Act 2007 as regulated by the Financial Conduct Authority.

Why don’t more non-Muslim entrepreneurs use Islamic finance?

Nada Jarnaz of law firm Howard Kennedy believe the main barrier is psychological. It is not easy to accept a new system when you think that the existing one is unique and perfect. However, if a business or project meets Shariah requirements, Jarnaz sees no reason why any SME should not request funding from an Islamic bank or financial institution. Specifically, Qardus, says it is open to approaches from non-Muslim owned businesses providing they meet Sharia principles promoting social good.

Further reading

What are the best business bank accounts in the UK?

The post Using Islamic finance for your small business – what is it? appeared first on Small Business UK.

This article will explore how start-ups can create irresistible investment proposals.

Imagine you saw a tinned soup on a supermarket shelf, you might have seen something like it before, but possibly not the exotic flavour. You’re intrigued enough to pick it up and take a closer look. The packaging is poorly lined up, some ingredients are missing, the allergens are unclear and there are some spelling mistakes. It’s unlikely to get into your basket.

So I ask myself why, over 16 years of seed investing, and thousands (upon thousands) of investment decks, have I seen only a small fraction of investment proposals that have been thoughtfully constructed to sell the investment? With the right amount of information to give confidence and the creativity to instil some emotion?

Any pitch document should be aiming to make any investment proposals irresistible, and land in the investor’s ‘basket’ (their portfolio). So the ingredients of a compelling pitch to investors are the same as a compelling offer to consumers — differentiation, distinctiveness and price.

1. Differentiation

• Insight: It is difficult to create new ideas out of the same view of the world that everyone else has. A real innovation is usually born from some inspirational insight that uncovers a truly new need or opportunity.

Effective insight can paint an irresistible picture for investors. This can be qualitative insight — such as some quotes from a focus group or other potential consumers, and/or your personal ‘aha’ moment where you first appreciated the opportunity. The aim is to place your investors into your consumers’ shoes, so they feel the need. Ideally there will also be some quantitative insight — the size and growth of the potential market and, within it, the specific need being addressed.

Human stories, about consumers and their needs for example, create an emotional connection to the market. Supporting these with the rational numbers to illustrate market size and growth and the part of the market that is addressable then pulls an investor into the commercial opportunity.

• The big idea: If an investor has appreciated the market need, by now they are desperate to hear your answer. Again, try to create some emotion. Bring the idea to life as much as you can. Even a rough sketch will say much more than many words.

Describe how the idea addresses the market need, how differentiated it is from the competition and how protectable it is – patents, trademarks or proprietary technology or process. However, be careful not to publicly publish anything about an idea for which you are subsequently looking to file a patent request.

• The business model: Sometimes, and ideally, the way you are setting up to do business is a source of differentiation — the ability to do something cheaper, faster or better than your competitors. Your secret sauce might be your channels to market, production, logistics, price, promotion and/or partners.

At seed stage you are unlikely to have it all worked out, so explain the choices you have made and be clear about any assumptions made prior to experimenting with the reality. Any early evidence will add credibility, as will your plans for how to quickly validate outstanding assumptions.

2. Distinctiveness

• Brand and marketing: Particularly for consumer businesses, but also for any other, an investor will want to see your talent to excite your audience, articulate your proposition and stand out from the crowd.

This is much, much, more than just a logo. It’s how your business ‘shows up’ on the page and how well it is already showing up in the rest of the world (your website, existing product or service packaging etc). Even if your thinking on this is so far unsophisticated (or you have limited PowerPoint or Word skills), it costs no more to execute something well than badly (and there is plenty of online training available). Anything associated with your brand that is slapdash will signal that you are uninterested in how all people (customers, clients, new recruits, suppliers, other investors) perceive your brand.

Beyond the creativity it is also some rationale stuff like a marketing plan — how you will get the message out, through which channels and how much it will cost?

• The team: Regardless of how compelling the market and the proposition is, the business will fail without the right team. And this is the element of your business that no one can clone.

This is sometimes about experience. Investors will value a team with experience in their chosen market and someone experienced as an entrepreneur growing a start-up. A successful exit is most highly valued but any entrepreneurial battle-scars will add credibility.

But this is also about personality & behaviours. Curiosity, empathy, energy, resilience, tenacity and charm are some of the aspect we value. How can you demonstrate these on a page or when talking to investors?

It’s important to show how a team’s strengths add up to more than the sum of the parts. If there are known gaps in a team, or because there is just one entrepreneur, it adds credibility to point these out, with a plan for addressing them.

3. Price

• The deal: If you are raising funding in return for equity and have a firm valuation for your business, then state the funding you are looking for and the valuation, i.e. to be clear about what equity you are giving up in return. It saves wasting anyone’s time. But you may be in early discussions and be looking for feedback about valuation — that’s fine, just make it clear this is to be negotiated. (In my next column we’ll look at setting a valuation).

• Financial projections: The deal now is only one part of the price to an investor. They are looking towards the potential future value to understand the relative value now and whether the difference justifies the risks and limited probability of success.

Any business looking for funding should have a three-year profit and loss account and at least a 12-month cashflow forecast. Highly capital-intensive businesses should also have a projected balance sheet.

That said, I rarely believe the numbers in a start-up’s business plan — it usually needs a few months of trading to put together a credible forecast. But I do look hard at them to understand that the entrepreneur has a good sense of finance, understands their commercial model and is ambitious whilst not deluded with an unrealistic level of growth. Then use the numbers to make my own projection of what might happen over the next five to seven years.

Whilst these are some components that should feature in any investment story, there is no ‘one size fits all’ answer. Every business has different strengths to highlight and should be getting across their own tone of voice. Indeed, nothing puts me off more quickly than seeing a business plan template pulled off the web and populated with words but no personality.

Maybe these points will help you move beyond a blank sheet of paper. If not, googling ‘pitch decks’ throws up various sites with lots of examples. it is useful to see what others have done — particularly when they have been successful. Although watch out for heavy tech and US bias. And some amazing businesses have funded despite their pitch deck, not because of it. You can sign up for crowdfunding sites and consider why is one campaign is funding and another not? Or ask experienced investors to share their favourite examples (without breaching confidentiality).

It’s helpful to have several versions of an investment proposal. You might have a one or two-page summary, a PowerPoint deck of a dozen or so slides, a full document and/or maybe a video — so you can target the occasion and the investor in the most appropriate way. However, regardless of format all but the shortest of summaries should address the points above and be dripping with personality and a brand tone of voice that brings the opportunity to life.

Are you interested in equity investment?

The Start-up Series, hosted by smallbusiness.co.uk, gives company the chance to secure equity investment of £150,000 to £250,000 every month. To find out more, go here.

Written by Matthew Cushen, co-founder at Worth Capital

Further reading

Small Business and Worth Capital partner to relaunch The Start-Up Series — with £250,000 equity funding up for grabs each month!

7 funding choices when it comes to financing your start-up

How start-ups can qualify and take advantage of EIS and SEIS 

The post 3 ways start-ups can create irresistible investment proposals appeared first on Small Business UK.

Forget about the fact that you probably could not have a finer education – our new chancellor won a scholarship to Winchester College, a dauntingly intellectual public school – where he became head boy – followed by graduating with a first in politics from Oxford University and then an MBA at Stanford, probably America’s version of Cambridge. (Our dear prime minister scraped a 2:1 while at Oxford, mainly down to his laziness.)

And it’s nothing to do with him being the son of a shopkeeper pharmacist and her GP husband, who experienced the day-to-day hardscrabble of running a family business. (They had their future chancellor son do the bookkeeping.)

No, the reason why new chancellor Rishi Sunak bodes well for small business is because of a paper he wrote for free market-leaning think-tank Centre for Policy Studies three years ago.

In it, Sunak – then an ordinary MP for Richmond in Yorkshire – argued that the government should support the creation of an investment exchange for SMEs, where ordinary savers like you and me could lend money to small businesses, trading bonds like shares.

This Retail Bond Exchange would generate fresh capital for SMEs, while at the same time offering savers a place to put their money where it would earn a healthy rate of interest.

These tax-saving bonds would give investors an attractive fixed return and could be included in the annual £20,000 ISA allowance.

In his paper, Rishi Sunak called on the government to help support the creation of this new retail bond market, one which would be suitable for any small business looking to raise anything upwards of £5m in capital.

The British Business Bank, he said, should package up smaller SME loans into a larger portfolio that could be securitised (bundled together and then sold to investors). These bonds would also be issued on the new exchange so that ordinary savers could enjoy the same opportunities as institutional investors.

Starved of finance

Small business, argued Sunak, is starved of finance – he estimated the shortfall to be £35bn – and encouraging private investors to lend money to SMEs would “give consumers a solid return and a stake in ‘Enterprise Britain’” he wrote in City AM.

Sunak pointed out that with the annual turnover of UK SMEs hitting £1.9tr in 2017, they collectively generate more revenue than Brazil and employed three times as many people as McDonald’s the NHS and the People’s Liberation Army combined.

The UK already has a retail bond market, known as the ORB, which was set up in 2010. By buying bonds, everyday savers can earn around six per cent interest by lending their money to companies to some of the UK’s most well-known companies such as Vodafone, GSK, BT and Marks & Spencer.

The problem with ORB is that it is mainly geared towards large companies that want to borrow an average of £95m. For SMEs, ORB’s costs and complexity put it out of reach.

Meanwhile in Italy an exchange called ExtraMOT has seen hundreds of Italian SMEs raise almost €2bn in average issues of just €8m, wrote Sunak.

“Astonishing as the successes of our SMEs has been, research shows that while Britain is great at creating businesses, it struggles to scale them up. A big reason for that is loans are far too difficult to come by, meaning new businesses often don’t have the money they need to grow,” he told the Yorkshire Post.

It will be interesting to see if, as chancellor, Rishi Sunak puts his words into action. In this instance, will his word literally be his bond?

Tim Adler is editor of Growth Business and Small Business

Further reading

What small business needs from new chancellor Rishi Sunak

The post Why Rishi Sunak is going to be good for small business appeared first on Small Business UK.

As an entrepreneur, it’s crucial that you understand the scope of the funding landscape. You wouldn’t start your business without knowing the market and your customers inside out, and the same approach should be taken to investment.

Often, entrepreneurs can become so preoccupied with chasing funding that they lose sight of the bigger picture. They don’t fully consider which funding source is the best fit for their business in the long term.

What is SEIS/EIS investment?

The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are a huge part of that funding landscape. They are designed to encourage investment into startups and early growth-stage companies through offering tax incentives to investors.

Investors can place a maximum of £100,000 (SEIS) or £1,000,000 (EIS) per tax year in return for equity.

Tech startups in particular can snap up a lot of this investment – the higher startup failure rate in the tech sector means that these businesses can easily prove that investor capital has to be at risk for both SEIS and EIS.

Some organisations that provide operational support to help found startups – for example through mentorship and the provision of a team and other resources – have now launched their own SEIS and EIS funds, including my own company Nova.

SEIS and EIS makes funding for startups more accessible and enables entrepreneurs to tap into a bigger pool of capital.

When theSEIS/EIS fund is an offshoot of an organisation that is already committed to helping entrepreneurs, the benefits are amplified:

• Encourage larger sums of investment through helping to lower risks of startup failure
• Deploy funds more regularly
• Help foster a better relationship between fund managers and entrepreneurs
• Ensure the fund is used in the best way possible.

In return for equity, SEIS/EIS can alleviate a lot of the headaches and unblock many of the barriers that entrepreneurs face.

Read: EIS and SEIS are foreign concepts to many business owners

Easier access to capital

SEIS and EIS are purpose-built vehicles for innovative startups to receive investment. The tax wrappers offered to investors exist to increase the amount of money available to startups, while also removing some of the barriers to access. If we consider the other funding options available to startups, many carry some sort of risk or barrier which prevents access to funds.

• Bank loans can be a source of readily available funding for startups. However, this may require entrepreneurs to utilise their existing assets as security against the loan in case they can’t pay it back – for example, their house. This degree of risk could act as a big deterrent for entrepreneurs, particularly those with a young family. Alternatively, they may not own assets of enough value to secure the loan against.
• Rallying friends and family to invest – often the first port of call – also carries significant risk and potentially requires a lot of convincing, in the first instance. If the business fails, their money will be lost and that’s a big risk, mental barrier and emotional burden for entrepreneurs to take.
• Likewise, with angel investors, the personal connection might be there but it still requires a lot of convincing to get them to part with their money.

Generally, it’s hugely wealthy individuals who would seek to use SEIS/EIS. If you can find somebody who fits this category – this could be an angel investor, and in theory could also be friends, family, or an acquaintance – then SEIS/EIS can calm down some of the things you might be nervous about as an entrepreneur, such as putting someone’s capital at risk.

The tax wrapper acts as a sweetener and could lessen the blow of any losses, ultimately helping to soothe some concerns and making it easier to convince investors.

Read: How can my small business make the most of tax reliefs available?

Less risk = more investment

When a startup specialist has its own SEIS/EIS fund, that risk can be reduced even further. This is because when the organisation itself is working with the startup, committing time, resources, and experts to it, it’s less likely to fail. (Nova’s startups, for example, are five times more likely to succeed than the average.)

This reduced level of risk is much more attractive to investors, giving them the confidence to invest more through an SEIS or EIS fund – creating a much bigger pool of capital for entrepreneurs.

Timely deployment of funds

Rather than relying on external SEIS/EIS funds that might only deploy twice a year, operating their own fund enables startup specialists to deploy investment more regularly, which means startups do not have to waste time chasing other forms of investment.

Less regular injections of funding mean that startups can often run out of fuel before reaching critical milestones. For tech startups in particular, where profit is often not a realistic target for the first few years, releasing SEIS/EIS funds more regularly could be a lifeline.

Where investment is the only means of financing a business pre-profit, it can help tech companies to reach important initial growth metrics, such as daily/monthly active users or retention rates.

Direct connection to fund managers

For any type of SEIS/EIS investment, the process for entrepreneurs is the same: they pitch to the fund manager.

When a startup specialist has its own fund (which operates as a standalone entity), the benefit is that the fund manager is not some remote figure with no previous knowledge of your business. Instead, they will understand the business models the entrepreneurs are working on and there will easy access between them.

Ultimately, this will help to increase an entrepreneur’s chances of a successful pitch, particularly early on in a startup’s lifetime, as the fund manager will be able to more easily identify progression and potential.

Making SEIS/EIS work harder

Finally, entrepreneurs benefit when a startup specialist manages its own SEIS/EIS fund because they will ensure the capital works harder. They too have a stake in how the startup performs, so they don’t help secure investment and then take a step back. A co-founding company will play an active role in ensuring the fund is utilised to maximum effect to make the startup a success.

Alistair Marsden is chief marketing officer of Nova, which has co-founded over 80 tech startups to date and generated over £100 million in shareholder value

Further reading

150 UK small business grants to apply for right now

Looking for finance? SmallBusiness.co.uk is working in partnership with trusted lenders to help you find the best business funding deals. Find out more here.

The post 5 reasons why SEIS and EIS are the best funding routes for tech startups appeared first on Small Business UK.

Four fintechs have been awarded £40m between them to address the £10bn funding gap caused by the lack of small business finance.

The £40m is part of a £775m programme funded by Royal Bank of Scotland as a condition of its bailout during the financial crisis.

A total of £425m will be given in cash grants to rival business banks and financial technology companies to support small businesses.

Previous recipients include Nationwide, Investec and the Co-Operative Bank.

Read: Best small business loans in the UK

Iwoca

Iwoca has been awarded £10m in funding, pledging to make £5bn available to small businesses by 2023.

The lender has pledged an additional £13m on top of the £10m grant to help open an office outside of London with at least 50 staff.

The £10m grant will expand Iwoca’s SME customer base to 150,000.

Since Iwoca launched in 2012, the small business lender has already funded 35,000 businesses in the UK, raised £350m in equity and debt finance.

Iwoca will make finance more accessible through the introduction of OpenLending, a customisable self-serve “plug & play” platform for a growing number of SME fintech partners involved in small business finance.

And Iwoca has partnered with Xero, the online accounting platform, to make its finance more accessible to Xero’s 450,000-plus UK subscribers.

Christoph Rieche, Iwoca’s CEO and co-founder, said: “Iwoca is the only SME lender in the UK with the scale, level of experience and technology to dramatically expand and transform access to finance for small businesses. Our proven track record of industry firsts includes integrating with eBay and Amazon, being the first business to offer a Lending API, and the first SME lender to integrate with OpenBanking. Winning the grant enables us to accelerate our mission to make finance available to one million SMEs.”

Atom Bank

Atom Bank was also awarded £10m BCR grant, which it says will help deliver an additional £3bn of business financing by March 2024.

The digital bank has already lent in excess of £200m to UK SMEs

The challenger bank will also:

• Deliver a digital toolkit to support the needs of small businesses
• Create 70 jobs in the North East of England
• Will invest £15m of its own money alongside the award

Atom aims to attract over 340,000 small businesses to its platform by March 2024.

Mark Mullen, chief executive and co-founder of Atom bank, said: “As a fast-growing new entrant we know just how hard it is to get a business off the ground and we recognise that the needs of smaller businesses are different from those of larger firms.

“We will provide SMEs with a truly digital offering that allows them to get on with the day-to-day running of their businesses, giving value back to customers and bringing some much-needed competition to the business banking market.”

Currencycloud

Currencycloud, the B2B cross-border payments provider, was also awarded £10m of funding to expand its platform.

Mike Laven, CEO of Currencycloud, said: “We’re delighted to have been awarded this £10 million grant by BCR to advance our global transaction platform to better serve the needs of SME customers, as part of our mission to open up high-quality international payments beyond the realm of big banks.”

Modulr

The fourth grant recipient was digital payments platform Modulr Finance, which has pledged to match the £10m BCR grant with £10m of its own money to help fund its expansion, creating 53 new jobs in Edinburgh.

Further reading

150 UK small business grants to apply for right now

The post Four fintechs share £40m funding pot to boost small business finance appeared first on Small Business UK.