3844328 / Pixabay

When your enterprise needs funding, where should you turn? You might be surprised to discover that the answer often depends on something seemingly unrelated: central bank rates.

What’s the connection between interest rates and your funding options? The nuances are more complicated than you might think.

Why Central Bank Rates Matter

For the uninitiated, central banks are state-operated authorities that manage currencies and money supplies. Critically, they also determine the interest rates that help guide fiscal policies. For instance, a central bank that wants to boost economic investment and consumption might lower rates. These institutions often hike interest to reduce risks and stabilize national economies.

Fed rates determine how lucrative it is for private banks to lend money. Although financial institutions set their own per-product standards, state rates shape the value of their corporate investment portfolios and their ability to profit from lending activities. This link has significant impacts on venture capital, or VC, traditional business loans, and the many other kinds of funding that firms depend on to thrive.

Understanding the Connections and Real-world Implications

In the U.S., the Federal Reserve, or Fed, is the central authority that determines interest rates. For years, industry observers have noted connections between this body’s decrees and the way people invest in new ventures.

When interest rates drop, for example, borrowing money gets easier because you don’t have to pay as much back. This simple fact can make it more likely that someone might invest in your company using borrowed money or cash derived from their other assets, as many venture capitalists do. Conversely, high rates commonly sour the prospect of short-term investing.

The Results of Hype and Rate Hikes

Many implications of central bank rate adjustments aren’t as clear-cut as the previous examples. For instance, 2014 saw some $30 billion raised by VC funds. The interesting side effect of this phenomenon was that many startup companies got overvalued simply because investors thought that tech deals were the hottest things to sink their money into.

This kind of market behavior is typical of many bubbles, so more experienced investors may not follow the general trend of jumping at opportunities whenever bank rates drop. On the other hand, raising rates can also have a negative impact.

Just consider what happened in late 2015. In the wake of dozens of firms achieving unicorn status, or valuations in excess of $1 billion, the Fed decided to bump rates by one-fourth of one percent. According to market watchers, the idea was to stop overvaluation trends and hype in their tracks before they led to another massive market collapse. As intended, investors who lost liquidity had to slow down their funding activities.

The End Message for Enterprises

It’s hard to tell how central bank rates will impact funding availability in the long run. For instance, where one investor views high interest as a sign that it’s time to take a break, others might actually sink more into VC-seeking startups because they’re losing out on their traditional investments, such as government bonds, loan and mortgage-backed securities, and high-value bank deposits.

Venture capital isn’t the only or best source of funding for many companies. Launching a crowdfunding campaign or seeking bankrolled new business partners might be more stable options for your firm. No matter what kind of investment you pursue, it’s critical to be aware of how bank rates impact what you sacrifice for corporate growth.