Have you heard of person-to-person lending websites? For entrepreneurs with poor credit ratings and unproven track records, these sites offer a chance to raise funds when banks and other traditional lenders say no. Lenders on the sites profit as well: in return for taking a risk, they often receive higher investment returns than they would with savings accounts.
 

Still, the interest rates are usually lower than those charged by credit cards, the last-ditch funding source for many start-ups. Two such sites have proven to be market leaders. The first was the US-based www.prosper.com In the UK the two major players are www.zopa.com and www.ratesetter.com.

Here is how it works: borrowers sign up for a free membership in, say, Prosper, who perform a basic credit check and assign each member a credit rating. Next, borrowers post loan requests, listing the desired loan amount up to $25,000. They also state the maximum interest rate they are willing to pay, how they intend to use the loan and the duration of the auction (between three and seven days), along with a credit score and debt-income ratio provided by Prosper. Borrowers then sit back and wait for lenders to offer loans at interest rates either at or below the preset cap. If a loan is fully funded, Prosper combine the bids with the lowest rates into a single loan and deposit the cash in the borrower's bank account within a few days. Prosper handle all the back-office work, including payment collections. In return, borrowers pay 1% of the loan amount upfront and lenders pay an annual fee of 0.5%. If a loan isn't fully funded within the auction time frame, the borrower is free to try again.

When you visit the websites, you will also notice that all sorts of groups have sprung up in their wake.

UK investors should be aware that this type of investing is not covered by the Financial Services Compensation Scheme, which guarantees up to £85,000 if a bank or building society goes bust.

From when Zopa launched in 2005 until 2013 investors faced losses if a borrower missed a payment or defaulted. The only protection was Zopa's expert team of credit scorers and the policy of splitting savers' cash between multiple borrowers, thereby ensuring a quality book of loans and softening the blow of borrowers running into unforeseen trouble.

But since Zopa followed rival RateSetter and established its Safeguard emergency fund to cover bad debts, the risks have been reduced. It has also established a nine-year track record of success, having lent £446m from 45,000 savers. Bad debts - which average around 0.7pc - are protected by the  Safeguard fund, which is a pot of money to cover the repayments.

Clearly, this is an ideal way to raise money if you don't have the traditional, low-cost options open to you. Also, I have to say, if you are looking for a business opportunity (or an investment opportunity), this could also be it. After all, there has to be room in the market for another similar player.