The mini bond market is set to boom this year, as companies choose to borrow from their customers rather than banks, according to research by Capita Registrars.
Mini bonds, unlike retail bonds, are not listed on a market and cannot be traded. They are typically launched by big consumer brands. Vouchers, loyalty points and free products are often offered instead of or in addition to an annual interest rate.
Capita expects the market to grow from less than £90 million last year to £1 billion by the end of 2013. Justin Cooper, chief executive of Capita Registrars, comments: "Mini bonds are going mainstream. Brands can raise capital at a time when lending from banks continues to prove challenging, and connect with their client base and involve them in the development of their business."
In the last couple of months The Jockey Club and Nuffield Health have launched mini bonds. Nuffield Health's issue is a five-year bond paying 6% (4.8% after basic-rate tax is deducted). It is expected to close to applications on 18 June.
The Jockey Club bond, which has already closed, has a five-year term, and pays 4.75% (3.8%) in cash and an extra 3% payable in rewards such as tickets and food at its 15 racecourses.
Both bonds are suitable for self-invested personal pensions, but not Isas. Neither bond is protected from loss by the Financial Services Compensation Scheme. Kevin Doran, senior fund manager at private bank Brown Shipley, warns: "Mini bonds are not suitable for novice investors."
This article was written for our sister publication Money Observer