A relatively new way for companies to borrow money directly from private investors, retail and mini bonds have caused their fair share of debate.

Yet despite the controversy, some estimations suggest the value of the industry could rise to £8bn by 2017, up from just under £90m in 2012.

We get acquainted with these types of investment.

What is a mini bond?

Simply put a mini bond is a way for companies to borrow money directly from private individuals.

Like a traditional bond, the holders are paid interest until the bond reaches ‘maturation’, when they are repaid the full value of their investment.

Unlike traditional bonds, these are marketed directly to investors and not listed on any stock exchange.

Are retail bonds the same?

Not exactly. Retail bonds are also marketed directly to investors but they are listed on a stock exchange. This means their capital value fluctuates because they can be bought and sold.

It also means they are subject to much stricter regulation than mini bonds. For example, the issuer must produce a detailed prospectus outlining the risks and rewards to investors.

Mini bonds are not listed on a stock exchange so are far more loosely regulated. No prospectus is required, for example.

Which companies have issued these bonds?

Tesco has issued multiple retail bonds, and Ladbrokes issued one in May 2014 to raise money for debt repayments.

Both companies offered around 5% interest on their retail bonds.

Mini bonds have been successfully issued by retailers such as John Lewis and Hotel Chocolat, renewable energy suppliers Good Energy and Ecotricity and horse racing group, The Jockey Club.

The interest rates on mini bonds tend to hover at between 6% and 8%.

Are there any other incentives?

Some issuers offer special gifts as enticements. For example, Mexican restaurant Chilango launched its Burrito Bond at the beginning of June, a mini bond paying 8% interest per annum over four years.

Along with the standard interest payments, it promised two free burrito vouchers to every investor, while VIP investors sinking £10,000 or more into the bonds are entitled to free food for the duration of the bond.

This has led some people to call the products ‘passion bonds’.

The interest on Hotel Chocolat’s 2010 mini bond was paid in chocolate; hotel website Mr and Mrs Smith allowed investors to recoup interest due in holiday vouchers. John Lewis investors were paid a 4.5 per cent cash coupon plus a two per cent store voucher.

What are the risks of investing in mini bonds?

Mini bonds are unlisted. That means you can’t sell one if you think the company might go under.

Basically, once you buy a mini bond you’re stuck with it until the maturation point. If the company goes bust in that time period, you’re out of luck.

You’re also on your own if – as happened recently with Wind Prospect Group – interest is paid late. With a listed bond or a retail bond the regulator and Stock Exchange will step in on your behalf. But with mini bonds, you as an investor are forced to track down your payments.

Mini bonds are not covered by the Financial Services Compensation Scheme, so if you lose money you have no form of insurance.

As mini bonds aren’t as tightly regulated as standard bonds, advertisements don’t have to include detailed information about the company’s prospects or the risks involved in investing.

Lower regulatory costs also make them cheaper to issue. This means small firms, which normally wouldn’t qualify to issue a retail bond, can issue a mini bond.

If you think you can evaluate the financial health of these companies yourself, proceed with caution. Smaller firms with a limited trading history can be difficult to appraise.

Should I be steering clear?

Not necessarily.

When you buy one of these bonds you’re essentially betting that the company is healthy enough financially to stick it out until the maturation date.

According to Richard Troue, head of investment analysis at Hargreaves Lansdown, these are higher risk than bond funds but could be more suited to an investor who already has a diversified portfolio and is looking to boost his or her income.