Mini bonds are an investment vehicle that has soared in popularity since the credit crunch, primarily due to the rise of crowd funding.
How do Mini Bonds Work?
For companies wishing to raise capital, mini bonds are a form of alternative finance whereby companies can borrow money in exchange for regular interest payments.
They do this by issuing ‘bonds’ – effectively IOU’s or loan notes – as an alternative to offering equity in the form of shares.
The investor earns an annual return via interest and recoups their investment when the bond matures.
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Are Mini Bonds a Good Investment?
In a time when returns from traditional asset classes are less enticing, mini bonds – some of which offer 8% or even 12% interest – are an appealing proposition.
In addition to the interest rates, some companies have also started offering incentives. If it’s a chocolate company raising finance with bonds, they may throw in a regular delivery of chocolate, for example. These incentives help investors form an emotional connection with the company they are supporting, as well as providing a nice perk. But they should never detract from the financial data itself, and the question of whether the overall investment is reliable, safe and worthwhile.
What are the Risks of Mini-Bonds?
The principal risk involved is whether the issuer either becomes insolvent or suffers other cash-flow problems which could impact your interest payments.
Mini bonds are currently unregulated by the Financial Conduct Authority, which means the companies in this space are not being monitored for hidden charges or other unwanted fine print. If they become insolvent, you will not be entitled to anything from the Financial Services Compensation Scheme.
The FCA has a useful article here outlining its own stance on the subject.
Cannot be Traded
Also – unlike retail bonds, for example – mini bonds cannot be traded on the stock market. This means once you’ve invested, your money is stuck there until the bond matures even if the issuer shows signs of financial distress.
What’s the Difference between Mini-Bonds and Corporate or Retail Bonds?
Both corporate and retail bonds are able to be traded or resold as the financial situation of the issuer changes, and the market itself.
Mini bonds, on the other hand, are more fixed investments, where the capital must be held to maturity before redemption.
Since bonds which can be traded are generally subjected to far greater scrutiny by stockbrokers, most financial experts consider mini bonds higher risk since their provenance is less known.
Mini Bond Success Stories
In recent years, many high profile companies have offered mini bonds, often via crowdfunding websites like Crowdcube. Television personality Hugh Fearnley Whittingstall issued mini bonds for River Cottage and raised almost £1m in 24 hours, offering 7 per cent interest annually over an initial five-year term.
Chocolatier Hotel Chocolat issued bonds between 2010 and 2014, resulting in the creation of some 600 jobs, new stores and sustainable cocoa projects in St Lucia and Ghana.
Mexican food chain Chilango issued a bond paying 8 per cent in 2014, while online wine retailer Naked Wines offered a bond in 2013 that paid 7 per cent in cash or 10 per cent in wine.
They are neither transferrable or convertible. Investors have to keep them for the contractually stipulated term.
Just as any company can issue a bond to raise capital, property mini bonds are those issued by development companies as a means of raising money for their projects.
PROS – Mini bonds are high interest, Can be held in an SIPP, low minimum investment; offer a way to invest in companies you are passionate about; loyalty scheme benefits + option to convert bonds into payouts as goods/services.
CONS – They are unregulated; Your capital may be at risk if the company becomes insolvent; they don’t have to offer financial statements in the same manner that corporate bonds do, Can’t go in an ISA, Not covered by Financial Services Compensation Scheme.