Businesses are rushing to raise funds from crowdfunding mini bonds as an alternative source of finance.
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Offered first on Crowdcube, the bonds are basically the same as corporate bonds offered on the London Stock Exchange Orb market – but with a few important differences.
Starting with multiples of £500 the Crowdcube bonds offer an investor base of 75,000 users keen to support start-ups and growing established businesses.
Most other corporate bonds ask for a minimum £2,000 investment over at least a five-year term.
How mini bonds work
Crowdcube’s bonds come with some terms and conditions:
- The bonds give investors a fixed income return – but the interest is paid at the end of the bond term
- Typical rates are fixed between 6% and 8% with the initial repayment repaid in full at the end of the bond’s life
- Investors should note that their capital is at risk as the bonds are not protected by the Financial Services Compensation Scheme (FSCS)
- The bonds are unsecured, non-convertible and non-transferable
- Terms are generally tie cash up over three or four years
The bond has two downsides for investors – they lose control of their cash for the duration of the bond and the investment is not safeguarded by regulators, so if the firm goes bust, the investment is likely lost.
Currently Mexican restaurant chain Chilango has burst through a £1 million target to raise £1.485 million with a Crowdcube mini bond.
The money is to fund expansion of the seven-restaurant chain with three new outlets in London.
As well as 8% interest, investors get free burrito vouchers – while those pledging £10,000 or more get a free burrito every week for four years.
Loyal customers and rewards
Corporate bonds are not new investments.
Department store and supermarket chain John Lewis raised £50 million, while smaller but established brands like Hotel Chocolat, King of Shaves and hoteliers Mr & Mrs Smith have also successfully raised much-needed development cash in the same way.
“Mini-bonds allow loyal customers and experienced investors to lend cash to a business for a much higher return than they would get from leaving their cash in the bank,” said Crowdcube founder Luke Lang.
“We’ve looked at this market and have a queue of businesses lined up to offer bonds. Our research shows this market could be worth up to £8 billion.”
Hugh Fearnley-Whittingstall, of TV’s Rive Cottage fame, also raised £1 million through a Crowdcube mini bond to grow his ‘canteen’ business in the West Country.