The investor will be repaid interest throughout the course of the loan, and they receive capital back at some point during the loan, either monthly or at the end of the term.
Crowdfunding investment platforms work slightly differently, but in some ways they operate in a similar way to the London Stock Exchange (LSE).
Companies are looking for debt or equity investment, and some platforms treat any new company wanting to come on the platform in a similar way to a float on the stock exchange.
Abundance Investment, a crowdfunding site, has as one of its managing directors a former head of equity capital markets for UBS who has done many initial public offerings (IPOs), in the past.
Founder and joint managing director Bruce Davis says that it issues an offer document in the conventional way.
"With a stock exchange IPO, the LSE does not sign off the prospectus, the prospectus is signed off by a law firm.
"In crowdfunding, the document is signed off by the crowdfunding lawyer."
In addition the offer documents are pitched at the small investor, so are 30 pages long rather than 200 pages.
Risk levels
Default rates are relatively low. According to the University of Cambridge, default rates in 2016 were 2.07 per cent across all models, though this was higher than the previous year's at 1.63 per cent.
According to the report, 17 per cent of people surveyed across the industry anticipated the prospect of default as being 'high-risk' or 'very high risk'; this puts it above the impact of Brexit, but far below the threat of a cybersecurity breach, with 45 per cent perceiving that to be high risk or very high risk.
Most platforms make clear on their website that capital is at risk. For example, most say in a prominent place that the investments are not protected by the FSCS.
Zopa spells this out even further by stating: "If a borrower misses four months’ worth of repayments, their loan is defaulted and your capital may be lost.
"After a default, we still make every effort to recover your capital, and return those funds to you. Your projected return factors in expected defaults, although actual defaults may vary."
Many try to mitigate that risk by spreading the loans across a portfolio of creditworthiness.
Some have even set up a contingency fund, in case borrowers default on their risk. Ratesetter has done this, setting up a contingency fund which charges a percentage from each of its borrowers dependent on their creditworthiness.
Mr Battersby says: "If your loan does default, that Provision Fund will step in and pay all the capital to the investor. Over eight years of operation it's always worked, it's always made sure investors get their money back.
