Setting up a mini-bond can prove an attractive way for small businesses to raise funding for growth, but the process has its perils. Richard Wheat, founder of MRM, launched them for John Lewis, the Jockey Club and more. Here, he offers his five top tips
Could the mini-bond become a new alternative finance route for smaller firms still starved of bank finance? On the face of it, the bonds offer an appealing way to raise funds – often directly from customers.
During 2015 mini-bonds became the bouncing baby of the bond markets. Typically, they are issued for terms of three to five years, at interest rates currently around seven to eight per cent – raising anything from around £2m upwards. One of the largest so far raised a sum north of £50m for the John Lewis Partnership.
But mini-bonds are not usually secured, not traded and not covered by the Financial Services Compensation Scheme – so a firm planning to issue one must present a convincing case to would-be investors.
And small businesses need to think through all the implications before they raise a mini-bond. Richard Wheat, founder director of communications consultancy MRM, has advised successful mini-bond launches – here’s his advice…
1. Make the business case for a mini-bond
Wheat says: “Before launching any mini-bond you need to make sure that it makes financial sense for your company. You should also consider other forms of finance such as raising equity or bank finance.
“We see ambitious boards and dynamic management teams using mini-bonds to engage more closely with their customer base and create a more appealing financial relationship than they’d have if they went to a traditional bank.
“But we turn down a lot of companies who are thinking about mini-bonds – often because they take a naïve view that it’s a way of raising cheap money. The reality is that a mini-bond has to be viewed like any other grown-up financial transaction.”
2. Assess the financial implications
“Mini-bonds typically have a lifespan of several years. So you need to consider carefully whether your business will generate the revenues in future years that will enable it to make repayments over the lifetime of the bond.
“You should consider risks such as a potential downturn in your own revenues during the period of the bond and how that would affect your ability to repay bondholders. You need an accurate and comprehensive assessment of investor appetite for your proposed offering.
“You could consider running a survey of customers to see how likely they would be to invest. Getting a good idea about investor appetite can make the difference between a successful mini-bond launch and an embarrassing failure.”
3. Issue an attractive prospectus
“When you launch a mini-bond, you should issue a detailed prospectus that sets out to investors everything about the business. Investors will want to know about historic performance and future plans – and how the money you’re raising will be used. It’s about providing reassurance.
“The prospectus should demonstrate that the due diligence you’ve conducted before launching the offer is solid and strong. It’s important to make it clear what you plan to use the money for.
“When we helped furniture chain Warren Evans raise £2.5m, they made it clear the money would be used to open eight new showrooms in the south-east.
“It’s essential that you’re upfront with prospective investors about the structure of your offering and emphasise that, as with any investment, their capital will be at risk if they choose to invest.
“This transparent approach is consistent with the Financial Conduct Authority’s guidance that companies should provide as much clarity as possible to potential investors.”
4. Focus on the investment case
“Solid investment fundamentals form the cornerstone of successful mini-bond offerings. But there are also opportunities to provide investors with additional benefits.
“For example, when we helped the Jockey Club issue its Racecourse mini-bond, investors received their 7.75 per cent interest split between 4.75 per cent in cash and three per cent in loyalty scheme points, which gave them benefits such as discounts on race-day tickets.
“The brewer Innis & Gunn offered a beer bonus when it launched its mini-bond. Lancashire County Cricket Club offered seven per cent, made up of five per cent in cash and two per cent in cricket rewards.
“So if you’ve got a product that’s popular and that you’re proud of, don’t just offer cash. It makes sense to engage the customer with other rewards related to what you do.”
5. Consider the role of your reputation
“You should enter a mini-bond offering with a genuine belief that it’s right for your business. You should have built a good reputation about money.
“A successful mini-bond fundraising has the potential to enhance your company’s reputation, especially among its customers. Conversely, a failed fund-raise can be a public humiliation.
“This makes it all the more important that you choose the right partners to work with on the mini-bond launch – including lawyer, accountant, registrar and PR team.
“Remember that anything involved with looking after investors’ money needs to be done with tremendous responsibility. If there’s uncertainty around your firm’s future, we suggest you don’t launch a mini-bond. But if you believe that investors can share in your ambition and growth – in a positive future – why not?”