This article clarifies the difference between Halal funding and interest-bearing loans by examining how BFF’s Halal funding option works in comparison to a loan.
BFF Income Share Funding, offers halal financing in the United States which can be used for basically anything in return for a fixed percentage of the financed person’s income for a fixed period of time.
Consider the following example of funding terms:
$50,000 in funding in return for 15% of financed person’s income for the next 5 years.
Funding terms differ depending on a number of factors including:
- The financing amount the customer needs
- The percentage of income the customer can afford to share
- The duration of the income sharing period the customer prefers
- BFF’s projection for how much the customer will earn during the duration of the contract.
Ultimately, whatever terms we decide upon, including the percentage of income to be shared and the duration of income sharing, are fixed at the outset of the funding agreement.
As you may have gleaned from what was described, our funding arrangements expose BFF to the possibility of profit or loss.
If the customer’s income meets or exceeds our expectations, we will reach or exceed our target return on our investment.
On the other hand, if the customer’s income falls short of our expectations we will fall short of our target return and we may even lose money on our investment depending on how much the customer’s income fell short of expectations.
Our payoff arrangement has many positive results including the fact that our well-being as an investor is completely aligned with the well-being of the people we finance; the better they do for themselves the better our investment in them will perform.
Sometimes, when people hear they will be sharing their income with someone else they have a negative visceral reaction to the idea.
In other extreme cases, our income-share funding arrangement is compared to indentured servitude.
The indentured servitude argument basically says that if the financed person is obligated to share a percentage of their income with their financier aren’t they just indentured servants?
This question makes a lot of sense if you don’t think about it.
For those who are unfamiliar, an indentured laborer is an employee (indenturee) within a system of unfree labor who is bound by a signed or forced contract (indenture) to work for a particular employer for a fixed time.
Indentured servitude was a way for poor Europeans to immigrate to the American colonies. Between one-half and two-thirds of white immigrants to the American colonies between the 1630s and American Revolution had come under indentures.
These indentures would stipulate that in return for the cost of the trip to America and the person’s living expenses when they arrived (food, shelter and some clothes), the indenturee would work as a servant of their employer for a period of time.
Indentured workers basically had to work wherever their employer told them to work, in the conditions they were told to work in and for the hours that they were told they had to work. They could not marry without the permission of their master. (1)
So is this what BFF does?
Well let’s see:
We don’t tell our customers where they can work.
We have no say in the conditions in which they work.
We have no say in how many hours they work.
We certainly don’t tell them whether or not they can marry!
The only possible point of comparison would be to say that in both cases the financed person receives upfront benefits in return for sharing the fruits of future labor.
However, “receiving upfront value in return for sharing the fruits of future labor” is basically the definition of financing in general.
If you take out a traditional loan with a set interest rate, guess what? You are committing a percentage of your future income to your lender.
The difference between an interest-bearing loan and BFF’s income-share agreements is that the percentage of income the financed person commits to sharing in the case of a loan is unknown beforehand and varies as their income varies.
On the other hand, with a BFF income-share agreement the percentage of the financed person’s income which they are committing is fixed at the outset of the agreement and the amount they pay is variable based on their income.
Let’s go back to the $50,000 for 15% of income for 5 years BFF income-share agreement (assume BFF projected the customer’s income was going to be $80,000/year on average for the life of the contract so that BFF’s target return is 12% annually) and let’s compare the payments of BFF’s arrangement with an interest-bearing loan of $50,000 with a term of 5 years and an interest rate of 12%.
Notice with BFF the percentage of income paid is fixed and the dollar amount of payments is variable.
On the other hand, with a loan the percentage of income paid is variable and the dollar amount of payments is fixed.
Notice also that with BFF, when the customer’s income is lower their payments are lower.
Whereas with a loan, when the customer’s income is lower the percentage of their income that they have to pay to their lender is higher.
So the choice between BFF Halal funding and an interest-bearing loan really comes down to: Do I want financing that adjusts advantageously for me so that I pay more when I can afford to pay more and less when I can afford to pay less?
Or, do I want an interest-bearing loan that responds negatively to my ability to pay and obligates me to pay a higher percentage of my income when I earn less and lower percentage of my income when I can afford to pay more?
Which is more like indentured servitude and which has more mercy in it?
Which is more advantageous to the customer?
If you’re interested in BFF’s income share agreements and would like to learn more about our equitable Halal funding option visit fundmebff.com