What are mini bonds and should you invest in one?

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Have you heard of mini bonds? No? Well, they’re just a way of lending money to a business – often a young business. But what are mini bonds and should you invest in one or are they too risky?

Company bonds, retail bonds and mini bonds

In financial services, the word ‘bond’ can have several meanings. Its true meaning is that it’s an IOU for a loan to a company or government. Confusingly, some fixed-term savings accounts are also called bonds, but that’s not what I’m talking about here.

There are different types of bond:

  • Corporate bonds: These bonds are issued by large companies and, in return for lending the company money, the lender receives a fixed rate of interest for a fixed term. Corporate bonds are normally only available in large minimum amounts (which can be £50,000 to several hundred thousand pounds). This means they aren’t generally directly available to individual investors.

SAVVY TIP: You can invest in corporate bonds through a corporate bond fund. Here, the fund invests in a number of different corporate bonds.

  • Retail bonds: These work in the same way as corporate bonds, but are issued with individual investors in mind. That means you can buy them with a minimum investment of, typically, £2,000.
  • Mini bonds: These are retail bonds that are often issued by new companies or those that have recently started. Sometimes they’ll be issued by companies that have been trading for several years. You can normally invest a smaller amount than you’d need to invest in a retail bond and, as well as being paid interest, you may get rewards.

SAVVY TIP: Unlike retail bonds, which can be traded via an ‘order book for retail bonds’, mini bonds cannot be traded and have to be held until the end of the term (until they mature). You generally get a higher rate of interest than you would with a retail bond

How to find out about mini bonds

Mini bonds may be advertised on crowdfunding or peer-to-peer lending websites or the firm issuing the bond may advertise or tell its customers about the bond directly.

What to be aware of

Mini bonds are not without risk. In fact, on the risk scale, they are pretty risky. That’s because you’re lending money to a start-up or relatively young company, rather than an established name, which you may do if you were to take out a retail bond. Also, the companies issuing mini bonds don’t have to go through the same level of scrutiny as a firm issuing a corporate or retail bond.

SAVVY TIP: A number of companies that have issued mini bonds have had something of a bumpy ride. One firm that issued mini bonds in 2011 was a renewable energy company called Wind Prospect Group. It wasn’t a start up but had a 15-year track record. In July 2015 it suspended interest payments for three months.

Some financial experts believe that mini bonds give investors the worst of both worlds, as you take on a similar level of risk as you would if you were buying shares in a young company, but you don’t get the potential rewards, which would be an increase in the value of the original amount you invested.

SAVVY TIP: All you will ever get with a mini bond is the original amount you invested plus the interest you’ve received over that term. If you were to invest the same amount in shares in the start up company, you could multiply the value of your money many times (possibly!).

Related articles:

What is crowdfunding and how does it work?

Saving with a peer-to-peer lender; are peer-to-peer savings safe?

How dividends are taxed from April 2016

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