On Friday, equity crowdfunding platform Crowdcube announced that research revealed that its bonds are notably “increasing the interesting rate.”
The UK-based website shared:
“The bonds on Crowdcube enable our crowd of over 220,000 people the opportunity to invest in more established businesses. In return, investors are receiving regular interest payments at regular intervals until the end of the bond. If you invest in a bond you’ll get a fixed income over the life of the bond and at the end receive your principal investment is returned.”
Crowdcube provided an example:
The crowdfunding platform explained how bonds actually work:
“Bonds give you the opportunity to back the businesses you believe in, support its growth and be part of the future success of that company. Previous companies raising finance through a Crowdcube Bond include The Eden Project, River Cottage and Chilango just to name a few.
“You can lend to established businesses through a bond on Crowdcube and get a fixed-rate return on your investment, businesses have offered anything between 6-11% interest per year on your investment. At the end of the term you will receive your investment back. So far, five companies have paid over £400,000 in interest to their Crowdcube investors. Your capital is still at risk; they are unsecured, non-convertible and whilst they may be transferable, liquidity is not guaranteed. Bond investments are not covered by the Financial Services Compensation Scheme.”
Noting the differences between bonds and equity, Crowdcube stated:
“Bonds are a debt based investment where you lend money to a company in return for a fixed income return. Whereas equity is purchasing a percentage or share of a business, usually in the form of shares.
“This is an important distinction between the two types of investment. When you invest in exchange for equity you become a part owner of the business and will share any dividend payments or profits from the sale of the company. By purchasing debt, in this case through a bond, you become a creditor to the company and get rewarded with regular interest payments.”
The platform also revealed what kind of checks it conducts:
“All businesses issuing a bond on Crowdcube have been carefully vetted by our experienced in-house team of financial and credit analysts. This team of industry professionals have held senior roles at established financial institutions including KPMG, UBS, HSBC, E&Y, Citigroup, Deutsche Bank and RBS. Our team conducts extensive due diligence checks on the issuers, including an assessment of the company’s financial position and projections as well as its legal structure. This ensures that anything made available for investors is fair, clear and not misleading and that any factual claims made by businesses seeking to raise funds through our platform can be sufficiently verified.
The bonds team also use a third-party industry leading analytics tool, Moody’s RiskCalc, to generate a Probability of Default (POD) on existing credit obligations (not including the mini-bond on offer). This is an appropriate measure of creditworthiness before the bond was offered via Crowdcube and can help you understand the level of risk and potential reward.
“Whilst POD is not a risk rating, it is an approximate measure of the creditworthiness of the issuer before the bond is issued. As such, it should be one of the factors considered by investors when assessing whether to invest or not.”
In regards to need for diversification when users invest, Crowdcube added:
“Diversification is an essential part of investing and refers to spreading your money across multiple investments and types of investments to reduce risk. Investors should only invest a proportion of their available investment funds via Crowdcube and should build a balanced investment portfolio. A study by Nesta revealed returns for angel investors across a diversified portfolio is 2.2 times the investment.”
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