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How will high interest rates impact cash-strapped tech startups?

Thu 18 May 2023

With interest rates soaring, startups are feeling the financial heat. The Bank of England’s consistent hikes to its base rate, recently hitting a 15-year high of 4.5%, are indicators of the end of an era of cheap borrowing.

These adjustments, fueled by attempts to contain burgeoning inflation, are not only making consumers buckle under the pressure of escalating living costs, but are also presenting a significant challenge to startups.

For startups, capital can be their lifeblood. They rely on it to fuel their growth, to innovate, or even just to keep the lights on. As interest rates rise, the cost of this capital increases, placing a stranglehold on the financial resources of these companies.

For startups looking to scale up or simply survive these challenging economic times, the regular increases in interest rates create complex issues.

Here we will explore the implications of this economic shift for startups and how they can effectively navigate through these choppy financial waters.

The Burden of Costly Capital

Many startups rely on loans, credit cards, or mortgages to maintain their operations. Higher interest rates translate to heftier monthly payments and less available cash flow. This financial burden may prolong the timeline for paying off loans and necessitate a rethink of fundraising and financing strategies. Particularly for high-growth startups, raising capital could become more challenging, as funding rounds will require higher targets that are harder to reach.

Increasing interest rates may also sway investors towards a more conservative or risk-averse stance, favouring in on firms with established profitability. In response, some early-stage startups might pivot to take on less debt, offering equity as a safeguard against mounting debt levels.

The Cash Flow Conundrum

Failing to brace for the implications of a high-interest rate environment could set startups on a path to potentially insurmountable challenges.

Both B2B and B2C startups could bear the brunt of higher interest rates. The impacts may range from declining consumer spending, to escalating supply chain costs and a surge in late payments.

The effort to chase overdue invoices not only eats into valuable time, but can also lead to cash flow bottlenecks. Rising labour and goods costs can also further complicate cost management and cash flow protection.

Unfortunately, there is no quick fix to these challenges, especially given the potential for future interest rate increases. However, for high-growth startups requiring funding to expand, several alternatives could provide more viable solutions than raising debt.

Strategies for Weathering the Storm

One viable option is fixed loans, which offer predictable repayment amounts throughout the loan term. This allows businesses to concentrate on achieving their core objectives. Alternative lenders may also offer a broader range of credit options than traditional lenders, potentially better suiting the needs of startups in the current economic climate.

However, opting for fixed loans alone is not sufficient. Startups should also consider diversifying their funding sources, exploring grant opportunities, strengthening their creditworthiness, and renegotiating with suppliers for favourable payment terms.

Startups should continuously monitor their cash flow and cut back on non-essential expenses, invest in cost-effective technologies, and potentially pivot their business models to adapt to changing market conditions.

The era of rising interest rates may indeed be challenging for startups, but with careful planning and strategic execution, they have greater opportunity to navigate these tumultuous waters.

> Read more: Top hedge fund traders to start using AI, survey reveals

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