CAN CROWDFUNDING AND MINI BONDS WORK IN HARMONY?
Luke Lang, Co-founder and Director, Crowdcube
The mini-bond market is set to boom, according to figures from Capita Registrars, which suggest it could grow to £1 billion this year and to a staggering £8 billion over the next five years, as investors increasingly look to put their money into them.
Mini bonds are becoming especially popular with growth companies, as well as more established brands, as a way of securing growth finance without having to go to the banks. They give customers the opportunity to give something back by investing in their favourite brands, while securing their future growth and success.
Hotel Chocolat, one example of a company that has used mini bonds to great effect, raised money to expand its farm in the Caribbean and its range in its shops, and when the Jockey Club needed funds, it launched a bond, raising almost £25m – far exceeding its initial target of £15m.
Mini-bonds tend to attract passionate customers who want to share in a company’s success. This was evident recently when London-based Mexican restaurant chain, Chilango, decided to expand its restaurants but needed the money to do so. The company launched a mini-bond, called the Burrito Bond, through Crowdcube, which went on to become the first crowdfunded mini-bond – combining mini bonds with crowdfunding – to raise £1m.
Hugh Fearnley-Whittingstall’s River Cottage has also just raised £1m on the Crowdcube site via its River Cottage Bond. Mini-bold holders also get money off at River Cottage’s three Canteens in Axminster, Bristol and Plymouth and free River Cottage membership, while Chilango’s investors get free burrito vouchers or a free Burrito every week for the life of the bond for anyone investing £10,000+.
Crowdfunded mini-bonds allow ordinary investors to buy into a business for as little as £500. But as with any investment, it is not a guaranteed return. Mini-bonds are unsecured, non-convertible, non-transferable and do carry risk. But with Chilango, for example, investors earn 8% interest a year over a four-year period. With most banks paying interest of less than 2%, you can see why some people have chosen to invest in mini-bonds.
For businesses as diverse as household names like John Lewis to boutique hotel chain, Mr & Mrs Smith, mini-bonds are an even more attractive option. Banks can be an expensive way of raising capital and often come with strings attached. They enable a company to take control and give something back to customers in terms of interest payments.
When Crowdcube and Chilango launched the Burrito Bond, we looked closely at the market and how mini-bonds and retail bonds were done. We realised that it was a fairly convoluted and disjointed process, which involves corporate finance, lawyers and accountancy firms. It seemed prohibitive and expensive, with firms charging large fees but not necessarily adding a lot of value.
Disrupting the market
Since Crowdcube had done a good job of disrupting the equity crowdfunding market, we wanted to do the same with the mini-bond market. A lot of our skillsets, which involve bringing complex solutions online and simplifying them, lend themselves to this market and there was an opportunity to shake it up.
When the likes of John Lewis and Jockey Club did their mini-bonds, you had to print out a document and send a cheque for them to cash. With crowdfunded mini-bonds, it is much easier. Crowdcube for example produces the invitation document, stress tests the financials, ensures they can sustain repayments and promotes it. Upfront fees are charged, depending on the bond itself, but they are much lower than the industry average of around £100k.
Sites like Crowdcube have the advantage of nurturing a large investment community of 75,000, to create a platform for investors to invest in different types of businesses – both equity and mini bonds. These are savvy people looking at a variety of opportunities where they can diversify and spread their risk.
Companies that use mini-bonds tend to be different to those that use equity crowdfunding. They must have years of trading under their belt, be already profitable and often have an established customer base, whereas equity is geared towards start-up and early stage businesses.
For fast growth companies, raising expansion capital can be a tough business, but the mini-bond market offers a pain-free and accessible way of doing this, while offering investors, customers and the general public an opportunity to own a piece of the pie – in some cases literally.