Don’t we all want to see our money funding something we think is worthwhile with the potential of earning us a decent return?
In practice it can be very difficult to keep track of where your money is, how it is being used, what returns it is generating and how much of that will actually come back to you after any fees.
The simplest and safest option is just to lock it away in a savings account but interest rates are currently so low and there is no chance of knowing how it is being lent out. There is no opportunity for that feel good factor you get when you help a business grow and help grow your wealth at the same time.
This is part of the appeal of direct lending and investments. The growth of crowdfunding over the last few years has arguably been caused, in part, by the increasing demand from investors to back projects they know and believe in and from businesses that have needed to find alternative forms of funding post the financial crisis.
In 2015, the UK crowdfunding market was worth £3.2 billion, with more than 20,000 small and medium-sized enterprises being funded by everyday lenders and investors. A whopping 88% of this  was some form of debt, perhaps because it may be a better fit for some investor’s risk appetites than making an equity investment in an early stage business.
However, it’s important that investors understand the higher risks involved with crowdfunding, including debt based, compared to saving accounts. Key things to consider include there is no guarantee that capital and returns will be repaid, there is no Financial Service Compensation Scheme (FSCS) deposit protection cover and there is less liquidity, meaning it is likely that your money will be locked in until maturity.
We typically offer 1-2 year terms with bonds secured against tangible assets, and with an average interest rate of 5.8% per year
Unsurprisingly, within the range of crowd bonds we’ve launched, renewable energy has been the most popular sector. We have already invested more than £350m in UK solar, wind, hydro and biogas projects through the Downing funds that we manage, and it is often as these businesses mature that we can bring them direct to investors at competitive rates of return.
Keeping it simple
To help you understand where your money is going, each bond has a clear offer document that tells you about the business, the value of its assets, how your money is going to be used, how and when you should get your interest and capital back, and of course the risks and potential consequences if anything goes wrong.
We also detail the due diligence process undertaken for each bond offer.
By taking a debenture over the assets in the business, we ensure the borrower cannot take on any more debt that ranks ahead of you, and in the event of a borrower defaulting, Downing (as security trustee) can take control of these assets, and aim to recover some, or all your capital and interest.
To top it all off, our monitoring fees are contingent on you receiving your capital back and interest paid in full.
Partner & Head of Crowdfunding, Downing LLP
» To find out more on crowd bonds and to register for the latest offers click here .