Providence Bonds has launched its first mini-bond as it looks to raise £25m, Paul Everitt, European chief executive for Providence Group and director of Providence Bonds, has said.
“Government studies show that more than 99 per cent of private firms in this country are small to medium-term enterprises employing up to 249 people on average,” he said.
“They are the engine of the UK economy. These firms need capital to survive and thrive, and the banks are in general failing to provide it. In the meantime, many savers are being offered a below-inflation return on their cash savings.”
Mr Everitt said the mini-bond would help businesses grow and give savers a higher return on their investment.”
The bond, which pays 8.25 per cent for four years, will be used to finance small and medium-sized businesses in the UK and abroad.
Mini-bonds benefit from several features, such as explicit security or collateral over the assets of the business and the option to buy or sell a bond to a third party before maturity.
Providence, which has recently moved its headquarters from the US to London, specialises in factoring.
However, James Tomlins (pictured), of M&G Investments, said he was dubious about the emergence of mini-bonds in the UK.
He said: “A new source of finance for businesses at a time when bank lending conditions are difficult is something to be welcomed. What we would not want, however, is this to come at the expense of investor protections for bondholders.
“These protections have evolved over several decades and serve an important function in protecting investor rights and indeed their capital. They matter when things go wrong.”
So far, no UK mini-bonds have defaulted.
Mini-bonds are typically non-tradable debt instruments issued by companies directly to individual investors.
They have been growing in popularity in the UK recently and have been used by hotels, coffee shops and shaving product companies to raise money.
Stephen Womack, of Northamptonshire-based David Williams Independent Financial Advisers, said: “We are not actively using mini-bonds in portfolios.
“There are issues around the practicality and the ability to do proper due diligence on these bonds, and the question of price valuation is also uncertain.
“Whereas if you look at the alternative of the order book for retail on the London Stock Exchange, that’s much more profitable because it gives you transparency and liquidity.”