Entrepreneurs should be careful when they shop around for funding.

Much is written about how to attract business angels to invest in your business, but where is the advice for entrepreneurs on how to negotiate a good deal?

A visit to my local electrical store the other day got me thinking about how satisfying it can be to get a good deal, but also how difficult it can be to avoid some of the pitfalls while negotiating it.

Though I’m not usually the type of person who gets caught up in a craze, I finally gave in and decided to get myself an iPad I thought now would be a good time to invest in one, finally convincing myself that this is something I must have. I also needed a new laptop after the death of my hard drive this week. In the present economic climate I figured that going in with the intention to purchase these two items would get me a good deal, after all, both involved a significant outlay.

The problem was my attempt to confuse the salesperson was met with an equally clever attempt to confuse me. What started as a simple attempt to get a discount turned into a battle of wills and the introduction of a host of additional products I didn’t need but which were being “thrown in” to sweeten the deal. The smiling salesperson came back with what he said was “the deal of the century.”

Knowing there is no such thing, after more haggling I managed to get a further 18% discount as well as a case and some cleaner which I didn’t really need but was nice to have.

This experience got me thinking, if this is what you get in a shop how hard can it be for entrepreneurs who manage to get their idea in front of a business angel and then have to go through all the negotiating to get a good deal? For those who are financially astute and good at mental arithmetic this shouldn’t be a problem, but what if you are an inventor who wants funding to get a product to market, but who lacks valuable skills when it comes to negotiating a good deal?

Business angels will invariably want a decent piece of the action in the form of an equity stake that will eat into any money the entrepreneur will make. Many will of course throw you an array of added benefits from their involvement including mentoring, ‘the contacts to make it happen’, experience in your industry sector etc etc.  but don’t forget that like the salesperson in the electrical store, they will be looking to make a bit of money out of you and your idea in the process.

The words business angel conjures up a cosy image of someone who only wants to help, but given the risks they take with early stage companies, can these business angels really be in it just to help out? Of course not! They are little different from your average salesperson on a commission.

A quick browse on the Internet will reveal some cautionary tales about inventors who have fallen victim to greedy investors out to exploit them. One unfortunate inventor/entrepreneur managed to walk away with some investment from the online version of Dragon’s Den, fantastic! He might have thought, but having arrived with the intention of only giving away 20% equity, he left the Den after giving away a staggering 70%!

This highlights one very important skill an entrepreneur needs to be successful – the ability to negotiate.

Negotiating a good deal on everything relating to your business is essential and this includes those times when you need to source funding for your business. It is important to be single minded in your approach and not be influenced or confused by the promise of added benefits that will steer you away from your original intentions.

If you really need funding for your business you must also have enough belief in your idea to walk away if the deal isn’t right for you, whether or not it is funding from a business angel. If your business angel or group of angel investors really believe in your idea, you can and will negotiate fair terms.

Start-ups just aren’t feeling the love from banks right now

It may have been Valentines Day yesterday, but with banks’ reluctance to lend to businesses, they could push more start-ups into the arms of angel investors.

With UK banks still showing a reluctance to lend to businesses, companies could well be forced to look towards alternative sources to fund their ventures. The recession may be over, but with UK GDP figures just crawling over the line into positive territory, how are the banks doing? Those vital foundations of a functioning economy and an equally vital source of lending for start-up enterprises.

Banks may well have received an eye watering £850 billion of taxpayers’ money to keep them afloat but a glance through last week’s House of Commons Committee report, ‘Maintaining financial stability across the United Kingdom’s banking system’ the crisis of confidence that has haunted banks since 2007 appears to have a sting in the tail for businesses in the UK seeking funding.

Despite recent declarations that they are ‘open for business’ banks are still struggling to help those innovative start-up companies the country needs to help UK plc climb out of recession are still being starved of investment. Lending to business, as the report suggests, is ‘falling short of legally-binding commitments entered into by two of the banks that received the most support: the Royal Bank of Scotland (RBS) and Lloyds Banking Group’

The reasons for the banks’ inability to meet their lending commitments are unclear but when it comes to small or medium sized business, lending in a downturn is perceived as even more risky than usual. This creates a paradox where businesses are starved of the vital capital they need to grow which in turn can lead to the failure of those businesses vital to a flourishing economy.

This can only be bad news in the long term for banks looking to bolster their balance sheets. So where can businesses turn to for help? The obvious answer is angel investors.

What has become an age of austerity for the banks could be a golden age for angel investors, those wealthy individuals willing to take a calculated gamble on start-up companies. But it isn’t just start-up capital angel investors will need to provide if banks continue to refuse or give unfavourable terms to businesses hoping to borrow.

According to an article in this week’s Scotsman, angel investors in Scotland are increasingly acting as bankers to fledgling companies, providing £1 million in overdrafts or loans in the past twelve months. Angel investors are also being asked to act as debt providers in the absence of loan and overdraft facilities offered to businesses by banks.

It isn’t just in Scotland that banks are perceived as the villains for taking taxpayers’ money and showing reluctance to lend to businesses. Ask any business owner or entrepreneur in the UK and you are likely to hear that trust in banks is at a low-point.

This could well be good news for business angels, if not for entrepreneurs struggling to launch their businesses. As we have established angel investors are becoming more picky with the businesses they invest in, therefore for all but the most promising businesses, there will be no easy alternative and the door will remain firmly shut when it comes to accessing vital capital.

But what this means for business angels, who unlike banks require an equity stake in the businesses in return for investment, is they can now afford to be even more choosy when faced with more choice. Due to the perception that banks are the villains when it comes to lending, those businesses with the most potential will be more likely to take the angel investment route rather than approach the banks.

And for those entrepreneurs who do make it through the deal funnel, they can gain access to valuable advice and coaching from those who have been there before, rather than just cash from the bank.

There is a caveat. How many of these extra businesses seeking capital from business angels will be viable? According to the banks, one reason they haven’t been able to reach their lending target is the higher proportion of those companies needing credit not having viable business models.

This leads us to two conclusions. Business angels will need to be more wary when it comes to assessing the viability of companies. Banks meanwhile will need to be careful that their reluctance to lend now creates an irreversible trend of the best businesses turning to business angels for their start-up capital now and in the future.