Interest rates are a key driver of business valuation as they have an impact on both the cash flow for the company and the returns expected by investors. Over the past several years, interest rates have proven to be highly volatile, shifting from the near-zero rate environment of the late 2010s and early 2020s, followed by a period of materially higher interest rates. As interest rates are currently declining, valuation professionals and business owners are left to consider how this changing rate environment may affect business valuation conclusions.

Current Interest Rate Trends

Based on information sourced from the December 2025 National Economic Report produced by KeyValueData, interest rates have undergone great shifts. After the pandemic in 2020, the interest rate reached its second near-zero level in recent history. In January of 2022, the Fed began increasing interest rates in an attempt to fight inflation.

In 2024, interest rates reached a steady peak that was sustained for a few months but has been on a steady decline since. As of December 2025, the federal funds target range stands at 3.50%–3.75%. Along with this, prime rates fell from 8.50% in August 2024 to 6.75% by December 2025, easing borrowing costs for businesses. The same trend has been seen in 30-year fixed mortgage rates and credit card rates.

The Impact of Interest Rates on Valuations

There are multiple factors in business valuation that are impacted by a change in the interest rate. Three of the most impactful factors are the discount rate, cash flows, and capitalization rate.

Interest rates directly affect the base of the discount rate through the risk‑free rate, which represents the return investors can earn without assuming risk and serves as the foundation for both the cost of equity and the cost of capital. The cost of equity is calculated by adding various risk premiums to the risk‑free rate, while the cost of debt is also influenced by prevailing interest rates. As interest rates rise, investors demand more returns to compensate for opportunity costs, and borrowing costs become higher. Conversely, when interest rates decline, required returns and borrowing costs tend to fall, directly affecting the discount rate and, in turn, the present value of future cash flows.

What This Means for Business Owners and Valuation Conclusions

That said, decreasing interest rates do not automatically translate into a higher valuation. Interest rates influence valuations through discount rates, cash flows, and capitalization rates, but these effects are heavily shaped by company‑specific risks and long‑term expectations as well. Businesses with higher perceived risk may experience limited valuation benefit from falling interest rates, but the assumed higher company‑specific risk premiums can offset the effects of lower base rates. For business owners, this highlights the importance of managing company‑specific risk and strengthening sustainable cash flows, while also keeping in mind market trends.