Need Working Capital To Grow Your Business Without RIBA (interest)?

Assalamu alaikum to all readers,

Fuad here, 🙋🏻‍♂️

This week’s topic is a good one!

A lot of people ask if we can not take out debt, line of credits etc how do we grow our businesses that require working capital?

Today Insh’Allah I’m going to help you understand how and why!

So you can also educate the fellow brothers and sisters this alternative financing option, set them free from the conventional methods & their golden handcuffs with their banks.

When it comes to financing a business, there are generally two options: equity financing and debt financing.

While debt financing involves borrowing money from a lender, equity financing involves selling ownership shares in the business to investors in exchange for funding.

From an Islamic perspective, equity financing has several advantages over debt financing.

Firstly, equity financing aligns better with the principles of risk-sharing in Islamic finance. Remember in our earlier news letters how we said that we need to be able to risk share?

In debt financing, the borrower bears all the risk while the lender is guaranteed a fixed return.

This goes against the idea of shared risk and profit, which is a fundamental principle of Islamic finance.

In equity financing, the investors share both the risk and the profit, and therefore are more likely to make a careful and informed investment decision.

Secondly, equity financing is more flexible than debt financing. With debt financing, the borrower is obligated to make regular payments, even if the business is struggling.

This can create a burden on the business and its cash flow. In contrast, with equity financing, the investors are not entitled to regular payments and are more patient in waiting for their return.

This flexibility can be particularly useful for small and growing businesses, which may need time to establish themselves in the market.

Moreover, equity financing can also provide additional benefits for the business and its community. With equity financing, investors become part-owners of the business and are more likely to be invested in its success.

This can lead to a more collaborative and supportive relationship between the investors and the business. In addition, the business can benefit from the expertise and connections of its investors, who can bring valuable skills and knowledge to the table.

To give you an example:

let's consider the case of a Muslim-owned small business that wants to expand its operations.

The business could either take out a loan from a conventional bank or seek equity financing from Muslim investors.

With debt financing, the business would be obligated to make regular payments and pay interest, which goes against the principles of Islamic finance.

In contrast, with equity financing, the investors would share the risk and profit of the business, which aligns better with Islamic principles.

Furthermore, if the business were to be successful, the investors would benefit from the growth of the business and the profits it generates.

The investors would also be more likely to support the business and provide additional resources, such as networking opportunities and advice. Now you got other minds thinking for you masterminding creative ideas on growing it together versus a lender just interested in that regular payment each month.

In conclusion, equity financing has several advantages over debt financing from an Islamic, ethical & sustainable perspective!

It aligns better with the principles of risk-sharing and flexibility, and can also provide additional benefits for the business and its community.

Muslim or not, entrepreneur's should really consider equity financing as a viable option for funding their businesses and building a collaborative and supportive community of investors.

There are some that hold on to all of their 100% of equity which is fine and hence why they would prefer debt financing but they are also holding onto 100% of the risk! This can be construed as greed…

Don’t be greedy, bring on equitable partners instead PLUS its the halal way for a reason.

From my view, it’s not only about the money, it's also about the level of brain power you can load up behind your business!

That is where it will really explode! I would be selecting the capital contribution last prefrence vs what else will they bring to the table.

As they say God is with the Group!

So the next time you hear an entrepreneur say they had no choice, there wasn’t any other options etc, come back to them with some ammo with equity financing & perhaps mention this newsletter so they can grow too! 😅

Also please remember Im not a financial advisor, please seek independent financial advise before you action any of my content.

May Allah guide us in our financial decisions and bless us with success in our endeavors. Ameen

Wassalamu alaikum.