BrewDog is the latest company to raise finance by selling bonds to the public. It won’t be the last, says Simon Creasey
The name is bond, small bond - and it’s licensed to thrill more and more grocery brand fans as a growing number of small businesses turn to it as an alternative to hard-to -get bank financing.
Last month, BrewDog became the latest to go down the small bond route. It hopes to raise £2.2m through its Equity for Punks scheme, which was launched in the City by co-founders Martin Dickie and James Watt.
A slew of companies is expected to follow suit and the innovative financial mechanism is likely to gain further momentum in the wake of calls by an influential social innovation think tank last month for the creation of a small bond market.
So just how big an impact could small bonds have?
A relatively recent phenomenon in the grocery industry, small bond issues only really started to gain traction when the recession strangled off the usual channels of finance, forcing companies to get creative. Or one company at least.
The template for small bond issues in the UK was set by King of Shaves in 2009. Company founder Will King hit on the idea of raising cash using this mechanism after buying the domain name shavingbonds.com on a whim a few years earlier.
While raising equity to fund the company’s growth, King fielded lots of enquiries from people who said they would like to invest in the business. But conventional investment wasn’t an option at the time so he had to seek another way of finding finance. “It’s hard to sell shares to the general public when you’ve got a limited amount of private shareholders, so we came up with the idea of issuing a ‘shaving bond’,” he recalls.
People could apply for up to £5,000 of the non-transferable, non-convertible shaving bonds in multiples of £1,000. In return for their cash, bond holders were offered an interest rate of 6% per annum over a three-year period and shaving products worth between £30 and £60 each year.
King of Shaves made 5,000 shaving bonds available and the business raised £627,000 from about 400 people, a result that delighted King. The bonds mature in a year’s time and he hasn’t ruled out running another offer.
His advice to company owners considering going down this route is unequivocal. “If you’ve got a brand and a customer base and business that can support the ability to pay the bond back, then go on and do it,” he says.
Hotel Chocolat co-founder and CEO Angus Thirlwell did just that last year although its payback was rather different to King of Shaves’. Thirlwell wanted to raise money to fund the expansion of the company’s chocolate factory in Cambridgeshire and grow Hotel Chocolat’s portfolio of shops. He was also looking for a way to give the 100,000 members of the company’s Chocolate Tasting Club greater brand buy-in. So he decided to go down the small bond route paying out interest not in cold hard cash, but in chocolate.
“For members of our Chocolate Tasting Club we create a new selection of chocolate every month and send it out to them, so we thought that this could be a parallel with the monthly payout of interest,” he says.
Members could invest £2,000 in a ‘chocolate bond’ for a gross annual return of 6.72%, or £4,000 for a gross annual return of 7.29%. Those that took up the former option receive six chocolate tasting boxes a year with a value of £18.95 each, over a period of three years.
“After three years they can elect to have their money paid back in full or they can continue to leave the money in the bond and receive boxes of chocolate,” says Thirlwell. “It was an elegantly simple scheme and we raised more than £4m.”
BrewDog is hoping to raise just over half that amount through Equity for Punks, which it launched to fund the creation of a new eco-brewery in Scotland and the rollout of BrewDog bars throughout the UK.
In 2009, the brewer raised £750,000 through a similar investment project and after unveiling its latest small bond issue towards the end of July, it’s already secured funding of £1m. Some 10,000 shares are available at £95 each through BrewDog’s website. For every share, investors get a lifetime 5% discount in BrewDog bars, a 20% discount at the brewer’s online shop and the opportunity to create a special edition beer.
One of the main reasons the company went down this route was the continued reluctance of banks to lend to small businesses, says Watt. “With the current economic climate as it is, SMEs are struggling across the country. Innovative solutions like Equity for Punks give customers the chance to support local businesses and get more involved with brands they admire. It’s a win-win situation for us and our following.”
The success of small bond issues to date suggest we’ll see more of them over the coming months and years. Last month, Conservative MP Sam Gyimah called for the creation of a small bond market as part of a National Endowment for Science, Technology and the Arts (NESTA) debate looking at innovative ways of providing credit to SMEs. It’s a suggestion that receives a resounding thumbs-up from Watt.
“The bottom line is that the banks are not lending, so the government needs to step in and put measures in place for SMEs to access funding,” he argues.
It may be small beer in the grand scheme of things but small bonds could well play a big part in kickstarting the country’s economic recovery.