Funding decisions for startups in a high interest rate environment
As interest rates track ever higher, small businesses and startups bear the brunt.
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As interest rates track ever higher, small businesses and startups bear the brunt. But, while high interest rates and inflation create a turbulent financial environment, growth-minded businesses can still find success. From securing the right kind of capital to keeping a consistent cash flow and maintaining a growth trajectory, it might just require a reassessment.
“As a founder, it’s about understanding how to grow and thrive in the current interest rate environment,” says Matt Allen, cofounder of Tractor Ventures. “It’s about making sure you have a solid plan and buffer for your business to adjust to changes.”
Whether you’re bootstrapped or venture-backed, it’s definitely possible to weather the financial storm while maintaining a growth mindset. Here’s how the experts see it:
Financial literacy is more important than ever
Weathering the high interest rate period requires founders to take a closer look at their business’s financial position — something Planet Startup CEO Marc Orchard says is too often forgotten. “Founders care about solving problems and the technical product, but it’s often the financials that will make or break a business in markets like this.”
Whether it’s seeking external help or paying closer personal attention, the success of high-growth startups relies on a clear-sighted financial picture. In this environment, particularly, startups and SMEs should be keeping an eye on their revenue (both monthly and year-to-date), forecasting effectively and, according to Orchard, reserving enough cash-on-hand to cover the bare essentials, like paying suppliers and staff.
Orchard says founders also need to understand the financial levers available to them to keep growth ticking along during this slower period. These levers can be seeking funding and cash-injections, but also include cost reduction (“Hard and often people-related,” according to Allen), business model adjustments (low churn/burn where possible) and making price changes to keep the all-important cash flow ticking along. “Adjusting pricing strategies to ensure better margins can provide a crucial influx of cash into the business,” says Orchard.
Equity or debt?
Whatever the environment, startup growth can still hinge on securing external capital. With interest rates making it harder to land equity from venture capitalists and other external investors, alternatives like debt financing can be attractive ways to push growth without diluting ownership or control.
“A loan from someone like Tractor Ventures can be appealing because if you take $200,000 to $500,000 of debt that you can pay down, you significantly reduce the amount of dilution during a time where it’s pretty hard to get good terms even if you are doing well,” says Orchard.
Specialist debt financing lenders like Tractor Ventures can be worth investigation, offering an alternative to the steep terms of traditional lenders. There’s a caveat, though: always be aware of the risks. “Use debt when you are fairly confident about the returns it can generate for your business,” says Allen. “Using debt purely to run operations is not advisable. Only borrow the amount of money you can confidently deploy to drive growth for your customers.”
How to manage capital and risk
Interest rate pressure means, in general, less spending from businesses and consumers. With revenue slowing down and less capital to fund growth, founders need to make smart decisions about the balance of growth and risk. “During an economic slowdown, success for some companies means survival rather than growth,” says Allen. “Quality growth should not be sacrificed for the sake of quick growth.”
Seeking funding can still be a strong consideration for growth-aspiring startups but, as Allen says, the current state of play means looking for consistent options with less risk, rather than riskier, long-term plays. “Liquidity and yield are paramount,” he says. “For example, private credit returns can range from 10% to 15%, paid monthly on a relatively short lock-up period. If I have to choose between something promising a 20% return in ten years without liquidity and something that pays me every month, the decision is clear.”
For those in a position to do so — whether through shrewd business or the injection of capital from something like debt financing — a conservative approach to risk now should mean the chance to take advantage of a more free-flowing investment market in the near future. “Once major companies like Stripe or Canva IPO, or if SpaceX goes public, those events indicate that the waterfall of capital might start flowing again,” says Orchard. “We’re forecasting that more capital might enter the market by the end of next year or early 2026.”
