Many growing businesses find that they need additional capital in order to expand. Maybe there is a new line of business or a new set of products to distribute, but the owners of the business do not have enough money or do not want to put their personal funds into the business. Often in the United States, a business will get a loan from a bank. But these loans almost always involve interest payments, something many Muslims wish to avoid.
Some banks and financial institutions are beginning to offer Shari’ah compliant financing. However, most of these transactions are focused on real estate, particularly to replace home mortgages. If you are not able to find a suitable Shari’ah compliant loan for your business, fortunately, you can still look for an “equity” investment.
An “equity” investment is when the investor becomes a part owner of the business. The most common form of this is purchasing a share of the entire business and becoming a shareholder or partner in the business. An investor can also take an interest in only a part of a business’s operations. For example, if a clothing company wanted to manufacture a new line, but did not have the capital necessary to pay the upfront fees, the investment could be limited to that new line. It is up to the investor and the business owner to decide exactly how the profits may be split and when the money will be paid back. The agreements can also contain provisions limiting the investors rights to just that new line and/or allowing you to buy them out for a set amount.
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There are many different sources of investment, and many professionals to help you find them. The more common investors in small businesses, however, are the families and friends of the owners. Even if friends and family do not have the money to invest themselves, they may be able to introduce you to someone who has the interest and the finances to invest.
If friends and family are not a viable option, many businesses owners look for venture capital or angel investors. Both of these types of investors are typically looking for new or early stage companies. Venture capital firms, however, are typically highly organized and look to make investments of at least several million dollars. Businesses that do not need that much money can turn towards angel investors – individuals or smaller groups that typically make smaller investments. Many cities and regions have organizations that hold regular meetings to introduce angel investors to small local businesses. If you attend a few meetings, you may find the capital your business needs.
Of course, professional help is often necessary, and as such, bankers, accountants, and attorneys should be consulted depending on your personal needs.
This article is for informational purposes only, if you need legal advice you need to consult with an attorney qualified in your jurisdiction.Todd Gallinger is an Attorney practicing business law in Long Beach, CA. He can be reached at (888) 255-9147 or info@gallingerlaw.com.