Mini-bonds

For companies looking to raise capital — mini bonds are a great option.

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What is a mini bond?

Mini-bonds are a new and relatively low cost way for businesses to raise funds from investors (lenders). Essentially, a mini bond is an unsecured loan — held for its full term or until a company redeems it.

The mini-bond market has grown considerably in recent years, as companies have looked to other ways of raising finance.

Mini bonds are a type of debt financing and can be considered as an alternative funding solution.

Mini bonds — considerations

Mini bonds involve an investor making an investment in a business — in return for a bond. This bond is a debt product — usually in the form of a loan.

In exchange for lending the money — investors enjoy regular interest rate payments. When the bond matures, at the end of the term, the principle sum lent is repaid in full. As an example, a company may offer a 3 year bond, worth 10 million Naira, with a 9% interest rate.

Mini bonds can be thought of as small units of debt, issued by a company, in a way similar to traditional corporate and retail bonds. The difference is that mini bonds are not listed on any stock exchange — unlike retail bonds. Not being listed means mini bonds are typically not transferable i.e. they cant be sold on.

Mini bonds offer a number of advantages over conventional financing options. For one, companies get access to valuable non-bank financing — while investors commonly get higher rates of return (compared to leaving money in a savings account).

Most kinds of businesses can consider issuing a mini bond. It is particularly suitable for companies in consumer facing markets, who may find it easier to get willing investors — among their customer base. In this way, as well as raising funds, mini bonds can increase both customer awareness and loyalty.

Mini bonds are usually used to raise large sums of money — as companies need professional legal advice. This legal advice can be costly — so raising small sums is not really economical. The amount of money that can be raised is almost unlimited — restricted only by demand for the mini-bond.

A company generally does not have to be regulated by the Central Bank of Nigeria or the Securities & Exchange Commission — to issue a mini bond.

How do mini bonds work?

Businesses wishing to issue a mini-bond, will need to think about the terms of the debt. Terms include things like how much you would like to raise, how long you require the money for, what interest rates are you prepared to pay and is there any minimum subscription amount? You may even want to consider offering extra non-cash incentives — like discount coupons.

Using the services of professionals such as corporate lawyers, accountants and tax advisers — the mini bond would then be created via a legal instrument. Subsequently, the bond may be offered to the public through an “invitation document”.

Mini-bonds can be advertised through various online and offline channels. Online P2P lending platforms are a popular way of issuing and managing mini-bonds.

Benefits of a mini-bond

  • Debt financing — no need to give up equity
  • Funds can be raised relatively quickly — through online channels
  • Unlimited funds can be raised
  • Flexible lending option
  • Great way to involve fans or the public — in a company’s development
  • No strict lending criteria
  • Unsecured lending
  • Tax advantages

Limitations of a mini-bond

  • Need to offer high interest rates — to compensate for risk and attract investors
  • Professional advisor (legal, tax etc.) expenses — to create a mini bond

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