Many borrowers have successfully used minibonds to fund their businesses (from John Lewis to Harlequins to Chilango). This has been to the benefit of their bondholders but minibonds are issued by companies and they are not regulated. They therefore represent a high risk and are entirely dependent on the business of the borrower.
If the promoter is collecting the money in its own name and then investing it, then you take on the risk of their ability (and credibility) as a lender.
When considering an investment in minibonds where the promoter is acting for a borrower, there are things you should consider:
1. The promoter must be FCA registered and have the permissions to make the offer.
2. It should be 100% clear who is borrowing the money.
3. There should be no connection between the promoter and/or the borrower.
4. Ideally, the promoter should not collect the money – it should be collected by an independent, regulated entity.
5. The borrower should have a track record of success (either the business itself or, if it is a new venture, the people running it).
6. The borrower’s business should be of sufficient growth and/or margin to readily afford the interest and capital repayments (the latter meaning the business should have a clear way of repaying the capital at the end of the term).
7. Any security or backing for the bond must be sensible, identifiable, understandable and recoverable.
8. The borrower should commit to keeping its investors informed on how it is deploying the capital over the term of the bond.
9. The borrower should be offering a ‘reasonable’ interest; the higher the interest, the higher the risk and the more questions it should raise.
