Beth Foster was looking for a better way to invest part of her bonus than a savings account when she received an e-mail from her trusted online travel agent.
The privately owned travel start-up, called Mr & Mrs Smith, was selling a four-year bond directly to its customers, paying 7.5 percent interest in cash or 9.5 percent in Mr & Mrs Smith vouchers that could be used to book vacations.
With memories of a recent trip to Tuscany still fresh in her mind, Ms. Foster, 30, decided to invest just short of £5,000, or just under $8,000, and tapped into a growing market in Britain and the rest of Europe of companies seeking cash directly from individuals eager for higher returns in a low-interest environment.
"This is a much better and more exciting way to invest than a savings account," said Ms. Foster, a strategist at Google in London. "It seemed as safe as anything else right now."
With interest rates at a record low of 0.5 percent in Britain and many savings account rates below the country's inflation level, investors are jumping on products with higher returns, even if they are riskier. Companies are eager to explore new ways of financing as bank lending continues to be tight after the financial crisis.
Britain's retail bond market, where companies large and small go directly to individual investors to raise money, has soared to more than $2 billion a year from about $360 million in 2010 (the figures do not include unregulated bonds issued by the likes of Mr & Mrs Smith, which are not tracked). That is still minuscule compared to the $214 billion in debt issued by companies in Britain this year and $3.7 trillion worldwide.
Similar retail bonds are not offered in the United States, where investors hungry for yield have piled into corporate debt through investment funds. But the retail bonds speak to a broader trend of companies tapping people for money more directly and introducing greater risk. The Jumpstart Our Business Startups (JOBS) Act that Congress passed this year allows "emerging growth" companies to sell stock with fewer restrictions and then report less information to their shareholders than was required from ordinary companies.
Concerns about Europe's retail bonds are emerging, especially with the smaller companies. The bonds might appeal to customers of the companies because they feel they are supporting a start-up firm, but many are risky because they are unregulated and barely traded.
"It's a bit worrying that people are prepared to take extra risk because they know or trust the company brand name," said Howard Burchett, director of private clients at broker Charles Stanley. Mr & Mrs Smith said it planned to raise nearly $8 million with the bond and "cut out the big banks" while obtaining financing for an expansion plan. Leon, a sandwich shop here, plans to pay interest to its bond investors in salads and meatball wraps, while Hotel Chocolat, a British chocolate maker, has been paying bond investors in boxes of chocolate.
"Interest rates main institutions are offering are very low, there's no trust in financial institutions and it's pointless to keep money in the bank, so people are thinking, 'Why not?' " Peter Harris, co-founder of Hotel Chocolat, said. The company so far has raised more than $6 million by selling bonds.
While Hotel Chocolat's and Mr & Mrs Smith's unregulated bonds are not publicly traded and are purchased directly from the company, another more liquid and regulated area of the retail bond market is also flourishing. In it, a growing number of larger and publicly traded utilities and financial services firms have been soliciting retail investors over the last year or so.
For these companies, retail bonds are usually a cheaper and faster way to raise money than a traditional corporate bond. They do not require the services of investment banks or expensive road shows to garner investor interest, and listing fees are lower. Companies market their retail bonds directly to their customers through leaflets and by post rather than to financial institutions.
Investors in retail bonds that trade on the London Stock Exchange still need to purchase them through a designated broker, but they do not have to buy into a fund and are exempt from a certain tax on financial investments.
They also don't have to put up as much money. The minimum investment is well below that of traditional corporate bonds. For example, St. Modwen Properties, a real estate company that raised $127 million through a retail bond on Nov. 7, allowed a minimum investment of £2,000, or a little over $3,100. That compares with a minimum of nearly $80,000 for a corporate bond, according to the London Stock Exchange. St. Modwen's bonds mature in 2019 and pay a fixed interest rate of 6.25 percent a year. Other companies that issued retail bonds recently include National Grid, a utility; the financial arm of Tesco, the supermarket chain; and Severn Trent, a British water company.
"It's about diversifying our funding sources," said Michael McKeon, chief financial officer of Severn Trent, which borrowed about $120 million through 10-year bonds at a variable rate in July of 1.3 percent. "If it goes well, we should be coming back to this market more often."
Xavier Rolet, the chief executive of the London Stock Exchange, said he saw opportunities for similar markets in the United States and elsewhere in Europe.
Given that about three-quarters of corporate funding needs in Europe are met by banks, and banks are deleveraging their lending portfolios, "we see a good match between the yield in retail bonds and a lot of capital available from retail investors looking for that yield," Mr. Rolet said. "There is no yield these days unless you want to invest in Greek debt."
Eden Riche, head of debt capital markets origination at Investec in London, said the stock exchange's retail bond market helped to make bonds more attractive to ordinary investors because of greater transparency and a low minimum investment of around $3,000, on average. Once the bonds are traded on the exchange, investors can buy and sell them for as little as £100, or $160.
"You've got this huge pool of retail liquidity sitting dormant in savings accounts that is coming to the bond market, earning higher yield," Mr. Riche said. "But of course there is higher risk associated with this."
Retail bonds that are not traded on the exchange, like the Mr & Mrs Smith bond, can be bought from the company directly either through their Web site or by sending a check by post.
Ms. Foster, the Mr & Mrs Smith investor, said she discussed the move with her financial adviser, who had his reservations. But in the end, her decision was based on a little bit more than just pure financials. "I really believe in the brand," she said, "and it's much more appealing using your money supporting a U.K. start-up."