Mini-bonds are a way for individuals to lend money directly to businesses. They are in effect IOUs which the companies sell to investors.
Typically they have terms of three to five years, and investors earn regular interest payments during the life of the mini-bond. At the end of the term, the investors receive back their initial investment plus a lump sum of interest.
In the news
Over the past few years, companies as diverse as Hotel Chocolat, Naked Wines and John Lewis have issued mini-bonds to as a way of securing debt-based finance. More recently, CrowdCube launched one for the Eden Project. Some offer rates such as 7 or 8% interest to investors, or in the case of Naked Wine - 10% gross in wine credits.
How flexible are they?
Unlike traditional bonds, they cannot be traded and are not listed on any market. This means that they must be held until they mature and cannot be cashed in early - which can make them a less flexible choice for investors.
What are the risks?
The regulatory requirements are much less stringent for mini bonds than for listed bonds. This is good news for the businesses issuing them as it saves them a lot of paperwork and reduces the hassle of dealing with banks.
However, for investors this means an increased degree of risk; if the issuer goes bust then the investors will have to join the queue along with all the other creditors. Investments in mini-bonds are also not protected by the Financial Services Compensation scheme. They are generally unsecured, non-convertible, un-tradeable and do carry risk so a return on investment is not guaranteed.
A side-effect of the credit crunch?
The current increase in popularity of mini-bonds stems from the recent financial crisis which saw many smaller companies unable to raise capital from banks. Instead, to raise funds, some turned to equity crowdfunding and others began to offer mini-bonds direct to the public.
Given the current poor rate of return on savings, many investors have welcomed the opportunities that mini-bonds present. The promised returns are usually considerably more than those offered by a standard bank or building society savings account. Plus, some companies offer innovative ways to pay returns to their customers - Hotel Chocolat’s return included monthly chocolate box selections for investors.
THE SERIOUS INVESTORS GUIDE TO INVESTING IN STARTUPS
Download your copy today
Making investors into true stakeholders
Another - and secondary reason - for companies to offer mini-bonds to individual investors is that they see it as a way of engaging with their customers. Their hope is that by doing so they can encourage them to become true stakeholders in the company and strong advocates of the brand. Look at it this way, and they could almost be called loyalty bonds.
Interested in equity crowdfunding instead?
If you decide that mini-bonds are not for you, then feel free to look through our equity investment opportunities in early-stage and growth companies. Alternatively, find out more about our passive EIS fund, Fund Twenty8, designed to offer a diversified portfolio of at least 28 investments into EIS-eligible companies.