Navigating High Interest Rates: Strategies for Founders and CFOs in 2024

By Nathaniel Stone and Alan Faulkner, Managing Directors, Stifel Bank, Venture Banking

Founders and Executives will continue to face an uncertain interest rate environment in the year ahead. Here’s how to capitalize on the current high-rate era. 

The “free money” bonanza of the early pandemic years is long over, with interest rates currently at a 23-year high. 

In 2023, Founders and CFOs at businesses in various stages of growth encountered heightened challenges when seeking funding, and many pinned their hopes on the year ahead. At the start of 2024, it seemed that inflation was finally under control and monetary policies would soon relax. 

However, that rug has been pulled out again, with the Fed’s latest announcement confirming what everyone feared: Inflation isn’t receding as quickly as hoped, and rates are not likely to decrease as fast as initially expected this year.

With higher interest rates that come with persistent inflation, businesses may need to extend their runway further and recalibrate their long-term financial strategies as a part of capital planning. For instance, companies will need to continue to focus on cost optimization, increasing operational efficiencies, and diversifying revenue streams to mitigate the impact of high costs. 

The Federal Reserve Urges “Patience” on Rates

Federal Reserve Chairman Jerome Powell, along with other Fed members, has made it clear that the Fed is willing to remain on the sidelines and maintain the current level of policy restriction as they wait for concrete evidence that inflation is improving.

The Fed’s focus on “patience” is a response to the distinct lack of improvement in the latest economic reports. Recent data has not increased confidence that inflation is moving down to the 2% mark. By some measures, inflation has not only stalled but also increased, raising concerns about the effectiveness of current policy measures.

Several economic indicators reflect ongoing challenges: The U.S. unemployment rate is 3.9%, suggesting tight labor market conditions. This tightness means labor costs will likely remain elevated as labor scarcity persists. Additionally, businesses continue to struggle with higher costs for materials and rents, adding to the overall cost pressures.

While many Founders and CEOs have delayed fundraising in hopes of calibrating capital costs and valuations, a lack of change in macroeconomic conditions could mean leaning into the current environment despite the associated costs. Exploring equity capital alternatives and improving operational efficiencies have become more crucial for maintaining business stability and growth.

Navigating Uncertainty in an Election Year

Adding to the economic uncertainty is the upcoming election cycle. Historically, election years can introduce significant volatility into the markets as businesses and investors grapple with potential changes in policy and regulatory environments. The political landscape can profoundly affect economic confidence, investment decisions, and overall market stability.

During an election cycle, businesses that rely on favorable public policy such as climate tech might find it more challenging to secure investment as investors adopt a wait-and-see approach, preferring to delay significant financial commitments until the political outlook becomes clearer. This hesitancy can exacerbate the existing difficulties in raising capital caused by high interest rates and inflation.

The potential for policy shifts after an election can also impact strategic business decisions. Companies may need to prepare for changes in tax laws, trade policies, and regulatory frameworks, which can influence long-term planning and investment strategies. The combination of economic and political uncertainties requires businesses to be particularly agile and resilient.

High Rates Challenge Founders to Adapt

For Founders and CFOs, the message is clear: It’s time to adapt to a high-rate environment. Money is no longer “free,” which requires businesses to rethink their approach to raising capital and running their business.

Venture capital fundraising and deployment are down significantly.  In addition, many venture-backed companies are dealing with valuation overhang due to unrealized growth expectations and prior equity rounds priced at the height of the market. 

Raising capital in today’s environment is often a much slower process. Many investors are sitting on their capital and playing the waiting game for management to develop “normalized” valuation expectations. The era of “quick and clean terms” is largely over as longer diligence processes and structured capital are becoming more common in the VC ecosystem. 

The upside is institutional investors are currently holding substantial amounts of capital and businesses that demonstrate strong unit economics, clear growth strategies, and efficient use of funds are attracting very attractive equity terms given the prevalence of companies struggling to adapt to this new environment.  

Skilled management teams are employing proactive operational and capital strategies to navigate this challenging environment. Here are some suggestions: 

1. Reduce Cash Burn

In this high-rate environment, reducing cash burn is essential. Companies should scrutinize their expenses and find ways to operate more efficiently. This might involve:

• Renegotiating Vendor Contracts: Regularly review contracts with vendors and suppliers to identify opportunities for cost savings. Engage in negotiations to secure better terms, bulk discounts, or more favorable payment schedules. By leveraging your company’s purchasing power, you can reduce costs without compromising quality or service.
• Reducing Discretionary Spending: Examine all discretionary spending categories. Implement stricter approval processes for these expenditures and consider temporary freezes on non-critical spending. Prioritizing essential over discretionary spending can significantly lower cash outflows.
• Implementing Lean Practices: Adopt lean management principles to minimize waste and maximize value. This includes optimizing inventory levels, reducing cycle times, and improving overall process efficiency. Lean practices can help create a more agile and cost-effective organization.
• Outsourcing Non-core Activities: Consider outsourcing non-core activities to specialized service providers. It can often be more cost-effective than maintaining in-house capabilities for functions such as IT support, accounting, or human resources. 

By cutting unnecessary expenses, businesses can extend their runway and improve their financial resilience. Reducing cash burn not only preserves capital but also positions companies to better navigate economic uncertainties and invest in growth opportunities when they arise.

2. Improve Operational Efficiencies

Along with reducing cash burn, enhancing operational efficiencies is a crucial capital strategy in a high-rate environment. Conduct a thorough audit of your operational processes to identify inefficiencies and areas for improvement. Streamline workflows, automate repetitive tasks, and eliminate bottlenecks to enhance productivity. Investing in technology that improves efficiency can result in long-term cost savings and better resource utilization.

Leveraging data analytics to monitor and improve operational performance, and establishing key performance indicators (KPIs) to track efficiency, are essential steps. Additionally, cost optimization and margin improvement can be achieved by focusing on high-impact go-to-market strategies, leveraging channel partners, and negotiating favorable payment terms.

In challenging times, the best companies can find additional margin through these strategies, embodying the mantra, “Never let a good crisis go to waste.” By improving operational efficiencies, businesses can boost productivity without increasing costs and create a more agile and responsive organization.

3. Leverage Debt Financing 

With the substantial decline in VC investment, debt financing emerges as a viable alternative to extend runway and improve operational efficiencies.

Companies can take advantage of debt to fill funding shortfalls in capital raises or implement leverage to optimize a business’s capital needs without diluting equity. Take the Deep Tech industry, for example. It has accelerated as more hardware companies transition from concept to commercialization but this rapid growth often means capital needs increase faster than cash flows can manage. For sectors like this, where long development cycles are standard, structured debt financing can provide improved working capital and additional runway to achieve key milestones on less equity. Additionally, less capital-intensive businesses might opt for an undrawn facility to use as a bridge if a fundraising round is delayed or to bolster their liquidity position for equity valuation negotiations.

That’s where Stifel Bank’s debt structuring solutions come in. Our tailored debt products are designed to meet the unique needs of growing businesses, providing them with the financial flexibility needed to navigate the high-rate environment effectively. 

4. Take Advantage of High Savings Rates

Companies must be more strategic with their cash, taking advantage of higher savings rates available at commercial banks. We often hear from those who previously paid little attention to their interest rates. ​​While balance sheet cash is not intended to be used for speculation, many high-quality liquid and FDIC-insured investment accounts exist for the venture ecosystem. In the past, when interest rates were uniformly low, many companies did not prioritize optimizing their savings returns. However, in today’s high-rate environment, this oversight can be costly. With significant discrepancies in interest rates across financial institutions, you can’t afford to stay with a 2% rate if a 5% rate is available elsewhere.

As such, finding the right banking partner to offer top-market interest rates is essential. This involves actively shopping around and comparing offerings from various banks to identify the most competitive rates. 

With Stifel Bank as your partner, for instance, you can access cash management accounts through our Insured Cash Sweep (ICS) program, which offers high-yield savings solutions that maximize returns on liquid assets. Our accounts provide competitive interest rates, ensuring businesses can safely grow their cash reserves and maintain financial stability in a high-rate environment. With FDIC-insured deposits up to $250 million, Stifel Bank’s ICS program delivers a secure and lucrative option for managing your liquid assets. Full details and disclosures regarding the Stifel Bank Insured Cash Sweep (ICS) program can be found here.

It’s important to remember that a proactive approach to managing your cash reserves can significantly impact your bottom line. Say you have $10 million in cash on your balance sheet. Higher interest rates could enhance your liquidity management and generate additional income from your existing cash holdings – you could yield enough funding for employee hiring or marketing campaigns. 

In addition to boosting returns, higher savings rates can enhance your company’s financial stability. With increased interest income, you can create a more robust cash reserve, providing a cushion against unexpected expenses or economic downturns. This approach lets you maintain operational flexibility and invest strategically without compromising your financial health.

Make the Most of the Economic Moment

High interest rates and inflation are likely to persist for a while, but Stifel Bank can help you adapt to this reality and maximize available opportunities.

Stifel Bank works closely with Stifel Financial Corp. equity research experts to offer clients macroeconomic insights and leadership, helping companies strategize for the future and anticipate what’s next. Our bespoke solutions are designed to help businesses adapt to the trends and leverage high interest rates to their advantage. We also help companies drive yield on their cash – allowing them to generate additional income through high-interest growth accounts – and support returns for liquid assets, ensuring businesses maximize their cash reserves. Additionally, Stifel Bank clients have access to our market-leading insights, equipping them with comprehensive market understanding and informed decision-making capabilities.

Our experts are ready to help you navigate the complexities of the current economic landscape, ensuring your business thrives despite high interest rates and inflation.

Stifel Bank, Member FDIC.