Earlier this year mini bonds, also known as loan note offers, were once again put under the spotlight when a restaurant business which had issued a mini bond, collapsed, leaving over 300 investors potentially out of pocket.
But what exactly is a mini bond?
Simply put, they are loans made to businesses by investors. Interest is paid at regular intervals over a fixed time scale and the rates are higher than would typically be payable than if the investor’s money was placed in a high-street savings account.
At the end of the term, the capital is repaid.
As interest rates have fallen loan notes have become much more popular and it is now not unusual for them to be offered by smaller companies to private investors as was the case with the restaurant business.
An investment into a mini bond is into debt rather than equity, although many bonds offer some form of security as part of the package.
But buyer beware, loan notes are not protected by the UK Financial Services Compensation Scheme and, they are usually non-transferable and non-tradable so investors usually have to hold them for the full term. Returns are not guaranteed.
On the flip side, many mini bond issuers do get the investment documentation signed off by a company authorised and regulated by the Financial Conduct Authority who act as a ‘security trustee’.
Over the years, many high-profile names have used the mini bond market including Lancashire Cricket Club, Caxton FX, The Jockey Club and the $1bn+ valued unicorn business of Brewdog.
There have been several developments in the market over the past few years:
Some mini bonds are now issued on exchanges such as the Gibraltar Stock Exchange, and this enables them to be traded. An example of this has been Grand Design’s Kevin McCloud and his HAB Housing business, who have a bond issued in Gibraltar.
There are also several platforms that offer mini bonds to their investor base, and the platform carries much of the due diligence before listing it on their exchange.
Investments can often be made via an IFISA, the new Innovative ISA, where interest and capital gains can be received tax free.
If you are interested in investing in a mini bond you will have to self-certify as a sophisticated or high-net-worth investor.
It’s the same as with any investment; do your homework and get good advice.
If you are a business, interested in finding out more about mini bonds, we would be more than happy to help.