What Interest Rate Hikes by the Fed Mean for Your Startup

If you’re an entrepreneur or small business owner, you’re probably well aware that the economy can have a significant impact on your company’s success. One of the key drivers of economic growth and stability is interest rates, which are set by the Federal Reserve (the Fed). With last week’s increase of 0.25%, the Fed has raised interest rates by 4.75% since the start of 2022, and when the Fed raises interest rates, it can affect everything from your borrowing costs to your revenue growth. So, what exactly are interest rate hikes, and why does the Fed use them?

When the economy is booming, demand for credit tends to rise, and interest rates follow suit. Conversely, when the economy is struggling, interest rates tend to fall. The Fed uses interest rate hikes as a way to manage the economy. When the economy is growing too quickly, and inflation is on the rise, the Fed may raise interest rates to slow down borrowing and spending. On the other hand, when the economy is struggling, the Fed may lower interest rates to encourage borrowing and spending.

But what does all of this mean for your startup? Let’s take a closer look at some of the potential impacts of interest rate hikes by the Fed on your business.

1. Higher Borrowing Costs: One of the most immediate effects of interest rate hikes is higher borrowing costs. When the Fed raises interest rates, lenders may charge higher interest rates on loans. For your startup, this can make it more difficult to obtain financing, and may lead to higher interest payments on loans.
2. Increased Competition for Capital: Higher interest rates can also make it more expensive for investors to fund startups, leading to increased competition for capital. This can be especially challenging for a startup that may not have a proven track record. Investors may be more selective and cautious when choosing which startups to fund, and may require higher returns to compensate for the increased risk.
3. Higher returns on Invested Capital: Interest rate hikes are usually also followed by an increase in the yields of US treasuries. This means that if you invest your idle capital in treasuries, you may get greater returns on your capital.
4. Weaker Consumer Demand: Interest rate hikes can lead to weaker consumer demand, as higher borrowing costs can make it more expensive for consumers to buy goods and services. This can be especially challenging for your startup that rely on consumer spending to generate revenue. If consumers are less willing or able to spend money, you may see lower sales and revenue growth.

So, what should you do if you’re a startup owner facing interest rate hikes by the Fed? One option is to explore alternative sources of funding, such as equity financing or grants, to reduce your reliance on debt financing. You can also put your existing idle cash to use, and invest in short-term treasury investments that leverage the higher interest rates to generate returns and prolong your runway. Interest rate hikes by the Fed can have a significant impact on startups, but by understanding the potential effects and being proactive in your response, you can navigate these changes successfully and continue to grow your business.

Varni Labs Inc. (“Zamp Finance”) is an SEC registered investment adviser. The material presented is for informational purposes only and should not be construed as investment advice. It is not a recommendation of, or an offer to sell or solicitation of an offer to buy, any particular security, strategy or investment product. Investing in securities involves risks, including the potential loss of money, and past performance does not guarantee future results.