32 funding your business
Mini-bonds for business funding
A mini-bond is a corporate bond issued by a business to raise funds directly from private individuals. Bond holders are paid interest until the bond reaches “maturation” when they are repaid the full value of their investment and, unlike traditional bonds, mini-bonds are not listed on any stock exchange. Also, in comparison to interest rates on the high street, mini-bonds can offer as much as an 8% return for an investment as little as £60, writes Roger Gregory, partner, Pitmans LLP
Commonly businesses have encouraged investment through the mini-bond by offering more than just a financial return to investors and incentivised with special rewards during the term of the bond. The addition of the rewards is paramount in encouraging investors to support the brand and creating a stream of return business. The investors have a vested interest because of the incentives they receive through the term and essentially become mini- ambassadors to the business without the expense of a public relations or marketing team.
Mexican restaurant chain Chilango released a mini-bond via the online platform Crowdcube and in August 2014 successfully raised over £1 million which enabled the eatery to open three more restaurants. The “Burrito Bond” which has a four-year term and a return of 8% was purchased for a minimum of £500. The mini-bond enticed investors with a special reward of two free burrito vouchers during the term and for those putting in over £10,000 a free burrito a week for the full term of the bond. That’s 208 free burritos.
Popular brands such as John Lewis and The Jockey Club have also issued mini- bonds with special rewards with the latter offering “racing rewards” such as tickets and hospitality. Hotel Chocolat partially paid its investors’ interest with chocolate and popular hotel website Mr and Mrs Smith allowed investors to recoup interest due in holiday vouchers.
A further example of a restaurant business raising finance through a mini-bond was the popular canteen eatery River Cottage which also raised £1m via Crowdcube. Within 36 hours of launching its mini-bond, 283 investors became bond holders. The bond holders will receive a 10% discount at River Cottage’s three canteens during
www.businessmag.co.uk
the term of the bond and free River Cottage membership with access to a range of exclusive website offers. The mini-bonds benefit both sides of the investment by providing businesses with a direct connection to their customers and for customers, the ability to invest in their favourite brands.
As with all investments, mini-bonds do carry risk. Mini-bonds are unsecured debts which means that if the company suffers insolvency or financial difficulty, the investors could lose all of their money. Also, unlike UK savings accounts, mini-bonds are not protected by the Financial Services Compensation Scheme which provides protection to the first £85,000 on deposit, per account holder, per savings institution. Mini-bonds are also illiquid as they are non-convertible, unlisted and non- transferable and the bond holder is locked in for the duration of the term. Even though mini-bonds are a high risk proposition, the benefits are hard to ignore for those interested in investing in an alternative finance option.
Crowdcube is an online crowd-funding platform which has successfully launched a simplified mini-bond and charges a percentage success-based fee. Mini-bonds are an alternative to businesses having to pay continued lenders' account fees and additional bank charges. Crowdcube is authorised and regulated by the Financial Conduct Agency (FCA) which will hopefully increase the confidence of both current and potential investors using online investment portals as a credible alternative to mainstream banks and lenders. The regulation will provide a level of security which is afforded to listed bonds and Crowdcube has said it welcomes the additional protection for its investors.
The market for mini-bonds is booming THE BUSINESS MAGAZINE – THAMES VALLEY – FEBRUARY 2015
and Capita Registrars predict that the market could rise to £8 billion by the end of 2017, rising from just £90m in 2012. With the most prominent mini- bonds being brought to the market by the hospitality industry, the mini-bond is a perfect fit for those seeking to raise funds to expand their business and strengthen brand awareness without involving a bank which, in such an adverse lending climate, is extremely welcome to both start-ups and recognised brands alike.
Roger Gregory, a partner of Pitmans LLP, has acted on behalf of a retailer who issued a mini-bond and agrees that alternative sources of financing such as mini-bonds and peer-to-peer lending are here to stay and will only continue to be more popular as mainstream banks are still reluctant to lend at this end of the market.
Details:
Roger Gregory 020-7634-4634
rgregory@pitmans.com www.pitmans.com
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52