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This investment pays 8% a year – and offers free burritos. What’s the catch?

Is Chilango's new mini-bond worth the risk?

Mexican food chain, Chilango, has issued a new bond giving investors the chance to earn interest of 8% as well as a number of perks, including free burritos. But is this investment too spicy for people looking for a decent return on their savings?

The four-year ‘Burrito Bond 2’ a ‘mini-bond’, which sees you lending money to the restaurant chain in return for annual interest, and your investment repaid after four years.

This is the second bond Chilango has issued. In 2014 the first Burrito Bond attracted over 700 investors and raised more than £2m.

Chilango has 10 restaurants in London and one in Manchester, with plans of opening a new site in Birmingham in the next few months.

Mini-bonds have become a popular way for small companies to raise money, but they have been problems with these types of investments in the past. And they are far riskier than traditional fixed-rate savings bonds, with no protection for savers should the worst happen.

Here, Which? examines how this bond works – and how the less risky alternatives compare.


What is on earth is a ‘Burrito Bond’?

The Burrito Bond 2 is a mini-bond that requires you to invest a minimum of £500 for four years. In exchange, you’ll get 8% interest per annum over the life of the bond, which is paid twice a year.

Investors will also be able to take advantage of perks at Chilango sites across London and Manchester. For example, if you invest £10,000 or more in a bond, you’ll qualify for a Chilango Black Card, which entitles you to a free burrito every week for the entire four-year bond duration.

The table below shows the full list of perks available to investors for the duration of the Burrito Bond 2.

Investment Perk
£500 A voucher for two free burritos and a £10 promotional code for a free burrito delivered via Uber Eats
£1,500 A Chilango gift card with five meals
£2,500 A Chilango gift card with 10 meals
£5,000+ Unlimited free delivery on Chilango orders made via Uber Eats and a ‘Chilango Green Card’ – which gives you free guacamole on one meal per transaction
£10,000 A ‘Chilango Black Card’ – which entitles you to one free burrito a week

At the end of the four-year term, you can redeem your bond by giving six-months’ notice or you can let it roll over for another year at the same interest rate.

It’s important to note that if you buy a Burrito Bond, you don’t actually own a share of the company. This is because bonds are essentially loans for a fixed period which offer a fixed rate of interest.

Are mini-bonds a safe investment?

Mini-bonds – also referred to as ‘unlisted corporate bonds’ – are not subject to the same regulations as traditional bonds and therefore not protected by the Financial Service Compensation Scheme (FSCS).

This means that if the company that issues the mini-bond goes bust before your bond matures, you won’t get your money back.

This can be a real danger. Most of the companies issuing mini-bonds are relatively small and therefore inherently riskier than the more established companies, which offer conventional bonds.

Before you invest you should scrutinise the balance sheet of the underlying company, much as you would if you were buying its shares. That will give you an idea of how likely the company is to be able to pay you the interest it promises and return your capital at the end of the term.

If a firm goes bust, not unusual with small companies, you’ll almost certainly lose your capital. Such detailed analysis, however, can be very difficult given the lack of information that is publicly available about some of these firms.

Unlike retail bonds, mini-bonds are non-transferable, meaning that they must be held for the full duration of the bond and it can’t be sold or transferred to someone else.

There have been problems in this sector, too. Two firms, Secure Energy Bonds and Providence Bonds, have failed in recent years, which held around £15m of private investors’ money. In 2015, the Financial Conduct Authority issued a warning about the sector finding that some firms promoting the bonds were watering down the risks, failing to make clear there was a possibility investors could lose some or all of their money and giving a misleadingly upbeat outlook.

While mini-bonds offer attractive interest rates and perks, if you are thinking about buying one you should ask yourself the following questions first:

  1. Do you have the financial capacity to lose the money you invest should the company go bust?
  2. Would you be comfortable losing that money?

If you don’t have the capacity to lose the money you invest or aren’t comfortable with the level of risk involved with mini-bonds, you should explore different types of savings and alternative savings products too.

Best fixed-rate bonds

If you don’t mind locking your money away for a fixed period of time but have a lower risk appetite there are a number of fixed-rate savings accounts on offer.

Masthaven’s 48 Month Flexible Term Saver  and Ikano Bank’s 4 year fixed saver are the market leading fixed-rate savings accounts with the same term as Chilango’s Burrito Bond 2. Offering a table-topping 2.45%, the accounts requires a minimum deposit of £500 and £1,000, respectively.

We’ve rounded up the top five fixed-rate savings accounts with a four-year term and a minimum deposit of up to £1,000.

Product Provider Min Deposit Interest
48 Month Flexible Term Saver Masthaven £500 2.45%
4 year fixed saver Ikano Bank £1,000 2.45%
4 Year Term Deposit Issue 7 PCF Bank Limited £1,000 2.4%
4 Year Fixed Rate Bond Vanquis Bank £1,000 2.35%
4 Year Fixed Rate Account Hodge Bank £1,000 2.3%

Source: Which? Money Compare, correct as of 12 July 2018

Alternatives to fixed-rate bonds

If you don’t think a fixed-rate bond is right for you, there are a number of othe savings accounts to consider.

Cash Isas

Cash Isas allow you to save up to £20,000 tax-free each financial year. Like with traditional savings accounts there are instant access cash Isas, fixed-rate cash Isas and regular savings cash-Isas which allow you to adapt the product to your own particular saving style and financial circumstances.

Stocks and shares Isas

A stocks and shares Isa is a tax-efficient investment account that allows you to put your money into a range of different investments. Unlike cash Isas you should only invest if you’re prepared to risk your money fluctuating dramatically in value.

Regular savings accounts

Regular savings accounts require you to make monthly deposits up to a certain limit. These types of account may limit the number of withdrawals you can make each year, which could be a problem if you need emergency access to your money.

Easy-access savings accounts

Easy-access savings accounts allow you to withdraw money quickly and easily. Some accounts come with a card which allows you to make cash machine withdrawals, while others require you to take out money over the counter in branch.

Notice savings accounts

Unlike easy-access accounts, notice accounts require you to give notice ahead of withdrawing money and these periods can range from 30 to 60 days. Some accounts may allow you to make an emergency withdrawal outside of the notice period but this may cause you to lose some interest. 

Check out our guide on how to find the best savings account for more information and browse Which? Money Compare, which allows you to look at hundreds of providers and compare savings accounts to find the best deal.

Please note that the information in this article is for information purposes only and does not constitute advice. Please refer to the particular terms & conditions of the savings account provider before committing to any financial products.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

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