Crowdfunding through a bond is a way for more established businesses to borrow large sums of money from investors to help them grow. In return for their investment, investors receive regular interest payments which are usually paid at annual or quarterly intervals until the end of the bond. That means you’ll receive a fixed income over the life of the bond and receive your initial investment back at the end as well.
For example, if you invest £1,000 in a four-year bond with an interest rate of 8% per annum, you will receive £80 (before tax) of interest each year for the next four years – in total you will receive £320 gross rate of return – and when the bond matures you will receive your original £1,000 investment back too.
How do they differ to equity pitches?
Equity crowdfunding allows investors to purchase shares in a business, whereas bonds are a debt based investment where you lend money to a company in return for fixed interest payments.
When you invest in exchange for equity you become a part owner of the business and will share any dividend payments or profits from the sale of the company. By purchasing debt, in this case, a bond, you become a creditor to the company and are rewarded through regular interest payments.
In short, bonds give you a regular return on your investment. They are less risky than investing in equity, but the return on investment will be fixed. However, with bonds, your capital is still at risk; they are unsecured, non-convertible and whilst they may be transferable, liquidity is not guaranteed.
As with any investment, there are risks associated with crowdfunding investments. For further information regarding the risks associated with investments through Crowdcube please see here.
In order to mitigate the risks attached to crowdfunding investments, many investors seek to invest in a diverse portfolio of businesses. Many startups do not succeed, hence the importance of having a diversified portfolio, as even if just a few of your investments are successful, they may deliver a large enough return to make up for any potential losses. To date, only 14% of businesses to fund on Crowdcube have failed, demonstrating the sophistication of crowd investors.
For more information on mini-bonds, their risks and what you need to know before investing, please visit the FCA website.