Rates on savings accounts are still ridiculously low. The market-leading instant access account currently pays just 1.6%.
If you’re not prepared to take any risks at all with your money, then this is the sort of rate you’re just going to have to put up with. The Bank of England shows no real sign of raising interest rates until it’s absolutely forced to.
But if you’re prepared to stick your money in a less conventional home, you could earn a much better return – 6.65% a year. And while it’s nowhere near as safe as a bank account, it’s less risky than you might imagine.
It’s all thanks to crowdfunding…
Making money from government-backed green energy
Traditionally, companies raise money by either selling shares in the company to a few wealthy backers, or by borrowing money from banks or by selling bonds to institutional investors.
The idea with crowdfunding is that companies can instead raise money from lots of individuals who invest or lend small amounts, rather than raising large amounts from a few backers.
Now, you might think that crowdfunding sounds a high-risk form of investing. And that’s certainly true if you’re buying shares in start-up businesses – known as equity crowdfunding. (I wrote about equity crowdfunding a couple of weeks ago.) As a shareholder, you are entirely exposed to the fortunes of the company, and you are last in line, behind its lenders, when it comes to your claim on the company’s assets. You could easily lose all of your investment if the business fails.
However, there is a lower risk alternative – debt crowdfunding. This involves lending money to the company, which it promises to pay back with interest.
I’ve spotted a particularly interesting opportunity on debt crowdfunding platform Abundance. This enables you to lend money for solar power projects in the UK, and get a fixed income in return.
The latest project to appear on the Abundance platform is called SunShare Community Nottingham. This comprises solar panels on 20 different buildings in Nottingham. The managers need £900,000 to refinance the panels and it’s easy for anyone to invest. The minimum amount is just £5.
In return for your cash, you’ll get a 19-year debenture (similar to a bond) that will pay out an effective interest rate of 6.65% a year. And you’ll get capital repayments too.
So if, for example, you invested £950, you could expect to receive £90.39 a year. That’s made up of a £50 capital repayment plus £39.93 in interest.
Eagle-eyed readers may have spotted that £39.93 in interest is way lower than 6.65% of £950. However, the point is you will carry on being paid £39.93 each year even though the size of your invested capital is reduced each year.
When you’re in the last year of your bond’s term, your invested capital will be just £50, but your interest payment will still be £39.93. So over the whole term of the bond, your effective interest rate is 6.65%.
Abundance has already successfully raised all the money needed for five other renewable energy projects in the UK, both wind and solar. What makes these projects relatively low risk is that the government has given guarantees to pay a particular rate for electricity from renewable sources. These rates apply regardless of what may happen in the wider energy market.
This is not a risk-free investment
I have to admit, this appeals to me. But of course, it isn’t a risk-free investment by any means. For a start, 19 years is a very long time. If inflation and interest rates soar during that period, 6.65% may not seem such a great return.
And while there is a secondary market, it may not be very liquid, which means it won’t always be easy to cash out before the term is up. If you do invest, you should only do so with money you can afford to lock up for that sort of timescale.
And if inflation goes the other way and falls below 2.5% for a sustained period, it’s possible that Sunshare may not be able to pay out the full interest payments.
There may be unforeseen problems with the panels themselves. Or there could be a risk attached to the business model that I just haven’t spotted.
It’s also worth noting that while Abundance is regulated by the Financial Conduct Authority, your investment isn’t protected by the Financial Services Compensation Scheme. So if things go wrong, you won’t get a government bail-out, and you could lose all your money.
Other peer-to-peer options
If this doesn’t appeal to you, the Abundance platform isn’t the only way you can lend to businesses. You could also take a look at a website called Funding Circle.
Some would argue that Funding Circle isn’t a true debt crowdfunding platform. That’s because the investors (or savers) aren’t buying a bond or debenture. Instead they’re making direct loans to businesses via a ‘peer-to-peer’ platform.
I’m not hugely bothered by the semantics of whether Funding Circle is a peer-to-peer site or a debt crowdfunding site. What matters is you can get a pretty good return – roughly 5.8% a year – by lending to businesses on the site.
What’s more, on Funding Circle you’re not tied into a 19-year bond. That means it’s easier to get your money back if you need it. You can also get decent returns from two other peer-to-peer sites: Zopa and Ratesetter.
We’ll be looking in much greater detail at the peer-to-peer market in an issue of MoneyWeek magazine next month. If you’re not already a subscriber, you can get your first three issues free here.
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