interest rate mousetrap for saversIn an arid investment climate such as the one we are currently enduring, something that offers a return of more than seven per cent would seem to be something to jump at.

That is the sort of yield now being offered by some companies struggling to find investors to fund their operations while the banks drag out their anti-business lending strike.

In fact the number of businesses offering so-called retail bonds, or mini bonds, is growing strongly with household names such as retailer John Lewis leading the way.

One company, a manufacturer of solar panels, is not just offering six per cent a year but also a promise to pay three years’ of the advertised interest rate up front!

On a minimum investment of £1,000, that equates to a lump sum of £180 in an investor’s bank account within a month of taking out the company’s bond.

Too good to be true?  Well, if you are familiar with The Whitehall Partnership’s approach to investment and are regular reader of these blogs you will know the answer to that question.

It probably is too good to be true.  I have a number of reasons for urging caution on anyone with money to invest who is itching for even a half decent rate of return.

The level of risk associated with such bonds is high as they are not underwritten by the financial protection scheme, which means that if the company issuing them goes bust investors lose their money.

In the case of the solar panels company, you invest your £1,000 and bank the 18 per cent interest rate straight away and then risk losing £820 of your capital.

And in a speculative business field such as solar energy, which depends heavily on subsidy for its viability, the risk of failure has to be high.

In any form of investment, to lurch blindly in waving your cheque book without reassuring yourself of the borrower’s ability to meet their promise to pay is tantamount to financial suicide.

When considering such a move, it is essential to check the credit-worthiness of the company issuing the bond and whether its cashflow is sufficient to meet both its interest rate payments and its running costs – in other words the likelihood that it will default and go out of business.   And, in the case of small companies with only short business histories, that can be difficult – even more so for private investors without the necessary forensic accountancy skills.

Commentators say there has so far been no instance of a company issuing retail bonds going into default.  But it is still a very young market, and while there may well be some sound businesses out there offering seven per cent a year it is too early to pick the winners from the likely losers.

Retail bonds could prove to be oases of fertility in a Saharan investment climate for some, mirages for others.

They are definitely not for the risk-averse who cannot afford to lose even a penny of their capital.  And even those investors who fancy a flutter and can afford to lose should not venture into the retail bond minefield without first talking it through with a highly qualified independent financial adviser such as The Whitehall Partnership.

For unbiased advice on any aspect of your investments or pensions savings, call us today on 0845 43 49 250 to arrange a meeting, free of charge and without commitment, at a time and location to suit yourself.


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