Raising finance for customer bonds is becoming more popular.
In recent times, customer bonds have begun to be used more frequently by the more established medium sized enterprises in order to raise finance to further their aims, likely due to the laborious, difficult and bureaucratic procedure that faces businesses today when applying for money from a bank.
It is surprising that customer bonds have gone relatively under the radar when it comes to money raising techniques, especially considering just how useful and profitable it can be in the long term.
Some prime examples of companies that have reaped the benefits from using customer bonds to acquire funding are Hotel Chocolat, foreign exchange supplier Caxton FX and King of Shaves, all of which revolutionised their businesses and took them to new heights of prosperity after utilising the method.
What are Customer Bonds?
For all those who are unfamiliar with what raising finance from customer bonds entails, it simply involves a business issuing a non-transferable, non-convertible saving bond in which its clients and other party’s are free to invest a fixed sum of money into.
How does it Work?
Everyone who invests in the bond is rewarded by being paid interest- either in the form of straight money or as a valuable product on offer- on the sum of money they invested into the bond and all investor’s are then reimbursed at the end of the bond’s specified period.
Advantages & Disadvantages
In theory, raising money through customer bonds is an excellent, almost utopian way of bolstering your businesses finances, though the reality is that they are only applicable to businesses of a certain kind, and need to be approached in the correct way in order give the initiative the best possible chance of receiving a high level of investor backing.
The following is our insight into customer bonds, including which types of business are best suited to using the measure, how to approach the instigation of the bond and other key tips to ensure that your attempt at using them has the best possible chance of producing a profitable return.
(1) Only attempt to acquire funding through customer bond’s if your business has a large and committed following.
This is because in order to receive a sufficient level of funding through customer bonds, you will need a number of loyal customers to invest in you, who believe in your brand and business enough to part with their hard earned cash. If you are a small business who is yet to take off, then you will most likely be unable to attract investment from enough people because a loyal and large customer base will not be established yet. You should also keep in mind that trying to raise money through customer bonds means that your search for extra finance is made public, so failing to garner a credible level of money from your own customers can have a hugely damaging effect on your businesses reputation and image, and could detract other investors from placing their faith in your company in the future. So you need to be very confident of success before embarking down this road.
(2) Keep the price of the bonds cheap, and the loan period short.
You should seek to try and borrow the cash from your investors for a relatively small space of time, ideally for around 3 or 4 years. This is because this is a sufficient enough time to try and repay the money you borrow, but also not too long so that investors are not detracted from placing their money into your company due to apprehension about how long it will take to see a return on their investment. Similarly, price the bonds so that your customers feel you are being fair and offering them a good deal, because quantity is everything when it comes to customer bond finance. We recommend pricing them between £1000 and £6000, though we recommend taking professional advice to obtain the optimum valuation.
(3) Make it clear to potential investors as to why you need the cash and how you will use it for their benefit too.
Being transparent about your motives for seeking extra funding, and your intentions with the cash may seem obvious to many people, but a number of director’s have failed to do so in the past and have lost a lot of investor support as a result. Today’s business world is slowly moving into a reality era, where customers are seeking to re-assert their own wellbeing and contentment as the primary concern for companies, rather than being manipulated and subjected to gimmicks in order to be milked for profit. This mindset applies to investors as well, and your customers will want to know that you are being honest with them in order to feel confident that you will deliver on your promises to them.You should also highlight to your potential investors why you believe your product is innovative and will be a success, and convey your enthusiasm for the project. King of Shaves founder Will King says: “I decided to launch a customer bond because it felt like the sort of thing a consumer facing challenger brand would do, and because I wanted to continue the growth of the company in a different, exciting and engaging way. I felt it would get the brand publicity and bring it to a wider awareness – all of which it has done.”
(4) Keep your investors happy and push your product.
A great way to attract investors, or encourage people who have already placed money into your product to invest more, is to supply them with your products as an additional perk on top of the interest you pay to them. A great example of this working was when King of Shaves paid all of its investors who purchased ‘shaving bonds’ a hugely attractive 6% interest rate each year, and also gave them a number of their shaving supplies, worth as much as £60, in order to keep them content and feeling involved with the project.
(5) Assess your company finances and only pursue customer bond finance acquisition if they can afford to repay the debt.
It would be worthwhile conducting some long-term cash flow forecasts and analysing your current and future income against estimated expenditure, so that you can clearly ascertain whether it is worth the risk obtaining finance through customer bonds. It is integral that you remember that failing to repay your investors when the bond period comes to an end could have a hugely damaging impact on the reputation and future of your company; in reality it will probably end any chances of it prospering. Make sure you are confident that you will be able to repay the loan, because the stakes are undeniably high when it comes to repaying customers.
(6) Use finance experts and professionals to create the agreement.
Ensuring the agreement is equitable, deliverable and crystal clear is of paramount importance so that you do not get into hot water later on down the line for failing to adhere to legal requirements with your bond agreement. Addressing and resolving regulatory problems can often be a difficult procedure, so making sure you have the right professional people to help you overcome this is integral to having a stable and secure loan term.
(7) Suggest your investors roll over their investment for a new loan term, if you desire a new injection of finance at the end of the initial period
Compellingly, a number of investors tend to retain their faith in a business if they have seen tangible results during the initial bond period, so asking for more is simply asking them to carry on your journey with them on-board. A prime example of this working is the actions of Hotel Chocolat, who requested that their customers reinvest into their company after the initial bond period came to an end. Despite the owners identifying that they were apprehensive about the outcome of the request, a staggering 97% of its investors placed cash in the business again for three years, illustrating just how easy it can be to have a continual float of money if you have a loyal customer base who believe in your company.