As interest rates continue to climb, small businesses and startups are feeling the pressure. However, despite the financial turbulence caused by rising rates and inflation, growth-oriented companies can still achieve success. Whether it’s securing capital, maintaining cash flow, or staying on a growth trajectory, businesses may just need to reassess their strategies.
Matt Allen, cofounder of Tractor Ventures, explains that founders need to adapt to the shifting landscape. “It’s about having a solid plan and creating a buffer for your business to weather the changes,” says Allen.
Whether bootstrapped or venture-backed, startups can endure the challenges while keeping a growth mindset. Here’s how industry experts suggest navigating these tough times:
Financial Literacy is Critical
In a high-interest-rate environment, it’s essential for founders to closely analyze their company’s financial position. Marc Orchard, CEO of Planet Startup, emphasizes that while many founders focus on solving problems or perfecting their products, the financials are often what determine whether a business survives during market downturns.
To ensure success, startups and SMEs need to keep a close watch on revenue, both month-to-month and year-to-date, and accurately forecast future earnings. Orchard also advises having enough cash reserves on hand to cover core essentials such as staff salaries and supplier payments.
Founders should also be aware of the financial levers available to sustain growth during slower periods. These include not only seeking funding but also cost-cutting measures—though these can be challenging and may involve difficult personnel decisions. Adjusting business models to reduce churn and burn rates, along with revising pricing strategies, can help maintain cash flow. “Changing pricing to boost margins can inject crucial cash into the business,” adds Orchard.
Equity vs. Debt Financing
External capital remains a cornerstone for startup growth, but high interest rates have made it harder to secure equity from venture capitalists. In this environment, debt financing has emerged as an appealing alternative for growth without diluting ownership.
“A loan from Tractor Ventures, for example, allows startups to access $200,000 to $500,000 in debt, helping them avoid significant dilution when equity terms are tough to negotiate,” says Orchard.
Debt financing can be a worthwhile option, particularly with specialist lenders like Tractor Ventures, which offer more flexible terms than traditional banks. However, Allen warns that founders should only use debt if they’re confident it will generate returns. “Debt should be used strategically to fuel growth, not just to cover operational expenses,” he advises.
Balancing Growth and Risk
High interest rates generally translate to reduced spending from businesses and consumers, meaning revenue slows and capital becomes harder to secure. For startups, this means making smarter decisions about managing growth and risk. “In an economic downturn, survival can be more important than rapid growth,” says Allen. “Quality growth should take precedence over quick wins.”
Seeking capital is still a viable option, but founders should aim for stable investments with less risk. “Liquidity and yield are key considerations right now,” Allen explains. “If I can choose between a 20% return in ten years with no liquidity or a 10% return paid monthly, I’ll opt for the safer, short-term option.”
For startups with access to capital—whether through debt financing or savvy financial planning—a cautious approach to risk now can pay off when the investment market becomes more favorable. According to Orchard, a surge of capital could return as soon as major players like Stripe or Canva go public. “We’re predicting that by late next year or early 2026, we’ll see a renewed flow of investment,” he says.
With a careful balance of growth and risk, founders can position themselves to take advantage of better market conditions in the near future.
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