Mini-bonds – ripe for the picking?
Crowdcube co-founder Luke Lang discusses the alternative finance option which has found favour with established businesses and start-ups alike…
Currently flavor of the month, the ‘mini-bond’ is actually nothing new. John Lewis raised £50m by issuing mini-bonds, while smaller popular brands like Hotel Chocolat, King of Shaves, and boutique hotel chain Mr & Mrs Smith have also got in on the act.
It's a way for growth companies, as well as established brands, to secure growth finance and expansion capital without necessarily going to the banks. But it’s so much more than that. It gives customers the opportunity to give something back by investing in their favourite brands and secure their future growth and success.
Hotel Chocolat, for example, wanted to expand their farm in the Caribbean and chocolate range in the shops. When the Jockey Club needed £45m for a new grandstand at Cheltenham, they launched a bond to help pay for it, and racing punters came in their droves to help raise £15m in just three weeks.
Mini-bonds attract passionate customers who want to engage with a company and share in its success. Mexican restaurant chain, Chilango, has a loyal customer following with an ambitious team. When they decided to expand their London outlets, they launched the Burrito mini-bond through Crowdcube – the first crowdfunded mini-bond, combining mini bonds with crowdfunding, to raise £1m.
Another restaurant chain, River Cottage also recently raised £1m on Crowdcube through its River Cottage Bond, attracting 282 investors in just two days. There are other enticements for investors too; mini-bond holders get 10% off River Cottage’s Canteens in the South West, while Chilango investors get free burrito vouchers or, for those putting in over £10,000, a free Burrito every week for the life of the bond.
It’s more than a free lunch of course. Crowdfunded mini-bonds allow every day investors to buy into a business for just £500 – an affordable sum. As with any investment, it is not a guaranteed return. Mini-bonds are unsecured, non-convertible, non-transferable and do carry risk. But, in the case of Chilango, investors earn 8% interest a year over a four-year period. Given that you would be hard pressed to find a bank paying interest above 2%, you can see why some people have chosen to invest in such bonds.
For the business, it’s even more attractive. Banks can be an expensive way of raising capital and often come with strings attached. A bond enables a company to take control and give something back to customers in terms of interest payments.
Introducing crowdfunded mini-bonds
Before we launched the Burrito Bond, we looked into the market and how mini-bonds and retail bonds were done. We realised quite quickly that it was a fairly convoluted and disjointed process which involves corporate finance, lawyers and accountancy firms. It seemed to be quite prohibitive and expensive, with firms charging large fees for what we perceived as not adding great value.
As we disrupted equity crowdfunding, we thought we would disrupt the mini-bond market and turn it on its head. A lot of our skillsets, which involve bringing complex solutions online and making them straightforward, lend themselves to this market and we felt there was an opportunity to shake it up.
When John Lewis and Jockey Club opened their mini-bonds, you had to print a document and send a cheque for them to cash. With crowdfunded mini-bonds, it’s much easier – we produce the invitation document, stress test the financials, make sure we believe they can sustain repayments, and promote it. We charge upfront fees, which depend on the bond itself, but they are much lower than the industry average of around £100,000.
We also nurture a large investment community of 75,000, and we want to create a platform and funnel for investors to invest in different types of businesses – both equity and mini bonds. These are savvy investors looking at different options and are always interested in a variety of opportunities where they can diversify and spread their risk.
Eligibility for mini-bonds
We have found that companies that use mini-bonds are different to those that use equity crowdfunding. They must have years of trading under their belt, already be profitable and often have an established customer base, whereas equity is geared very much towards start-up and early stage businesses.
For us, it’s great to have this mix of established brands like River Cottage and Chilango on board and we've already got more bonds already lined up. Our plan is to run several bonds a month each year or so and also raise bigger amounts of £10m and north of £20-30m.
Getting the best people with plenty of experience is key to success. Our team of mini-bond specialists has been operating in the market for years and have worked on several notable bonds including Ecotricity and Mr & Mrs Smith which means that we can hit the ground running.
Research from Capita Registrars suggests that the market for mini-bonds could rise to £8bn by the end of 2017. This is a huge opportunity and the market is ripe for the picking for those offering the right incentives and skills to deliver the best returns.