Crowdcube: Earn 8% from a ‘burrito bond’

Crowdcube, the equity crowdfunding platform, is moving into the world of ‘mini-bonds’.

A London restaurant chain called Chilango is aiming to raise £1m by selling a mini-bond on the Crowdcube platform. This bond will pay 8% interest a year to investors.

What does this mean for Crowdcube?

This is a very interesting move for Crowdcube. Until now, Crowdcube has purely been an equity crowdfunding platform. In other words, private individuals have been able to invest money in young businesses via Crowdcube and received shares in return.

By moving into mini-bonds, Crowdcube is tapping into a whole new market and should be able to make a lot more money as a business.

What exactly are mini-bonds?

Mini-bonds are very similar to corporate bonds. As with corporate bonds, investors are lending money to a company and receive an IOU in return. Investors, known as bondholders, receive interest payments from the company and eventually get their money back when the bond matures.

Mini-bonds differ from normal corporate bonds in three ways.

• Firstly, the companies raising money tend to be quite small, although that isn’t always the case.

• Secondly, mini-bonds aren’t traded on the stock market, so it can be hard, if not impossible, to sell your mini-bonds.

• And finally, mini-bonds aren’t as tightly regulated as corporate bonds.

In the last couple of years, mini-bonds have been issued by a wide range of organisations including Hotel Chocolat, the Jockey Club and King of Shaves.

Now Chilango is joining the club with its ‘burrito bond’.

How does the Chilango mini-bond work?

Chilango is a small Mexican restaurant chain with seven outlets in London. The company wants to raise at least £1m so it can open a further three restaurants this year.

Any UK private investor can get involved, and the minimum investment is £500. The bond’s duration is four years, and you’ll be paid interest every six months at an 8% annual rate.

You’ll get your money back after four years, although you’ll have the option to extend the bond for a further year if you wish. You won’t be able to sell these bonds – there will be no secondary market – so you’ll have to wait four years to get your money back.

Should you invest?

Well, 8% is certainly a very attractive rate. It’s way better than a bank savings account, and it even beats the rates you’ll get on most peer-to-peer lending sites such as Zopa and Ratesetter.

Chilango is also pretty exciting business. I’ve eaten there once and I enjoyed it. The management team looks good, and several leading players in the restaurant industry have invested in the company.

It’s growing fast and it’s not far off from breaking even either. It made a loss last year of £270,000 on turnover of £4.2 million.

And if you look at Ebitda  profit, Chilango was actually £111,000 in the black. (Ebitda stands for earnings before interest, tax, depreciation and amortisation, and is the most generous measure of profit.)

However, an 8% interest rate inevitably comes with a fair bit of risk. Chilango is a young business, so there’s a chance things could go wrong and the company could become insolvent. If that happens, bondholders will lose their investment. And they won’t get any compensation from the FSCS (Financial Services Compensation Scheme.)

What’s more, if Chilango becomes a roaring success, which it may well do, bondholders will never get more than 8% a year. The big profits will be made by the shareholders.

So personally, I’m not going to buy the burrito bond. The risk/reward ratio isn’t right for me. I just wish Chilango was offering shares rather than bonds on Crowdcube, then I’d be very interested indeed.

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2 Responses

  1. 10/06/2014, Clive wrote

    If you fancy lending money to businesses, better to use Funding Circle. Can lend as little as £20 to a business and you get to choose the businesses, the rate of return (up to 15%) and the level of risk. For a relatively modest £2,000 you can spread your risk over 100 businesses. However, there is a risk you WON’T get all of your money back. Having said that, I’ve had money in FC for years.

  2. 12/06/2014, DGL wrote

    By spreading loans about – e.g. Zopa or Funding Circle you reduce risks – BUT you can’t shelter the loans in a tax-free platform like ISAs or SIPPs.
    It’s starting to look like one SIPP platform (SIPP Club) will allow loans by Thin Cats to be SIPPed. Unfortunately minimum loans are quite chunky ( I think £ 10 k ? )

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