Leo Tolstoy’s classic quote goes, “All happy families are alike; each unhappy family is unhappy in its own way.” While he meant that for families, the same could be applied to startups. In times of economic prosperity, startups often thrive under similar conditions—ample funding, low interest rates, and a receptive market. However, when the economic climate shifts, each startup faces its own unique set of challenges that test its resilience and adaptability.

And in our case, it was the high interest rate environment.

BorderDollar started out as a cross-border financing startup at the end of 2023, and it has been nothing short of a rollercoaster. In our previous issue, we complained about the high interest rate environment, which led to an all-around harder time to raise funding. In this article, we’re stepping up to complain some more and share how the interest rates have affected us apart from funding.

Feeling the pain

For an early-stage lending startup like BorderDollar, a high interest rate environment presents a trio of challenges that are difficult to navigate:

Increased cost of capital

High interest rates mean that debt investors and financiers expect higher returns. It makes sense—they’d rather park their money in safer investments like money market funds, which have become more attractive due to the rate hikes. In 2023, yields on money market funds rose significantly, often exceeding five per cent. Consequently, private credit investors began benchmarking their expected returns around 12 per cent APY—roughly double the rate of money market funds.

For a young financing startup without access to a bank’s line of credit, the options are limited and expensive. The elevated cost of capital squeezes margins and makes it challenging to offer competitive rates to borrowers while still providing attractive returns to investors. It’s like being stuck between a rock and a hard place—investors want more return, borrowers want lower rates, and we’re in the middle trying to make the numbers work.

Borrowers’ threshold for interest rates

There’s a limit to how much companies are willing to pay regarding the interest rates we charge. Borrowers in markets with long payment cycles but low margins can’t afford high-interest loans without jeopardizing their profitability. This shrinks our potential client base, limiting us to borrowers who either have higher margins or are willing to accept higher rates—often because they have no other options.

It’s a delicate balancing act. We can’t simply pass on the higher costs to our clients without risking losing them altogether. But absorbing the costs isn’t sustainable for us either. We’re basically juggling flaming torches while riding a unicycle—one wrong move, and it all comes crashing down.

Risk profile of borrowers

Venturing into lending to borrowers who accept high interest implies a higher level of risk. These borrowers may have weaker credit profiles or operate in volatile markets, increasing the likelihood of defaults. For an early-stage startup, a spike in default rates can be catastrophic, affecting both our financial stability and reputation. It’s the classic high-risk, high-reward scenario, but in our case, the potential rewards don’t justify the existential risks.

Also Read: Startup survival: Smart marketing moves for economic uncertainty

The winds are changing once again

All hope is not lost—this just means we’ve got to pivot to take advantage of the market conditions.

With indications that the Federal Reserve may consider further lowering interest rates in response to evolving economic conditions, we might start seeing things returning to a more favourable interest rate environment.

More importantly, a lower interest rate could boost another sector—cryptocurrency and blockchain. Historically, there’s been an inverse correlation between interest rates and the rise of crypto. When traditional investments offer lower yields, investors often turn to alternative assets like cryptocurrencies in search of higher returns. We think we might be in for another boom cycle.

So, what’s our next move?

We’re pivoting towards integrating blockchain technology into our platform and going into cross-border payments. While the journey has been challenging, we’re optimistic about what the future holds. The potential shift in interest rates offers a glimmer of hope, and our pivot towards blockchain positions us to capitalise on emerging trends.

As Tolstoy suggested, every unhappy startup faces its own unique struggles. Yet, it’s through these challenges that we find our resilience and drive to innovate. The road may be bumpy, but with determination and adaptability, we’re confident we’ll navigate through these obstacles.

So here’s to founders out there struggling, let’s hang in there and pivot if need be!

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