Defence Expansion Is Running Into a Financing Gap

30 August 2026

Executive Summary

Governments are dramatically increasing defence spending, but a new international initiative highlights an often overlooked problem:

Someone still has to finance the companies required to manufacture the equipment.

The proposed Defence, Security and Resilience Bank (DSRB) is seeking approximately €100 billion ($116 billion) to provide lower-cost financing to governments and defence contractors and guarantees supporting lending to smaller defence businesses.

Canada and eight other countries — Albania, Belgium, Greece, Latvia, Luxembourg, Romania, Turkey and Ukraine — have backed the initiative.

Britain and Germany have not yet committed to joining.

The initiative exists because rapid defence expansion is exposing a problem familiar across many industries:

Demand can be guaranteed while the supply chain still lacks the capital required to increase production.

UK Impact

UK defence companies are supported by extensive networks of smaller specialist businesses producing:

• Electronics.
• Precision engineering.
• Optics.
• Materials.
• Software.
• Engines.
• Sensors.
• Specialist components.

A government may place a major order with a prime contractor.

But a small supplier further down the chain may need to:

• Buy new machinery.
• Expand a factory.
• Recruit skilled employees.
• Purchase raw materials.
• Increase inventory.
• Finance larger receivables.

All before it receives payment for the increased production.

That creates a substantial working-capital requirement.

If lenders consider defence SMEs too specialised, too small or insufficiently collateralised, production can become constrained despite extremely strong customer demand.

Global Impact

The proposed DSRB is intended partly to reduce financing constraints affecting defence production.

It would seek to provide cheaper lending and use guarantees to encourage private lenders to finance businesses that might otherwise struggle to obtain sufficient capital.

The issue has implications far beyond defence.

Rapidly expanding industries frequently discover that their principal bottleneck is not demand.

Expansion may instead be limited by:

• Working capital.
• Factory financing.
• Equipment finance.
• Supplier credit.
• Insurance.
• Skilled labour.
• Customer payment terms.

The constraint may therefore not always be:

Can the company manufacture it?

It may be:

Can the company afford to increase production before the customer pays?

Our View

Businesses supplying sectors undergoing rapid expansion should map financial capacity alongside manufacturing capacity.

Companies should ask:

• Can suppliers finance a large increase in production?
• How much working capital will they require?
• Can they purchase equipment before customer payments arrive?
• Are banks willing to finance the sector?
• Are guarantees available?
• Are customers prepared to make advance payments?
• Can receivables be financed?
• Is credit insurance available?
• Could a smaller supplier fail despite having a large order book?
• Are expansion plans dependent upon one lender?
• Does the company understand funding programmes available in its sector?
• Could contractual payment terms be changed to support critical suppliers?

A supplier can have:

the customer, the contract, the technology and the order

and still be unable to manufacture the product.

A booming order book does not remove liquidity risk.

Sometimes it creates it.

Risk Indicator: ELEVATED – FINANCE & STRATEGIC SUPPLY CHAINS

Disclaimer

The information contained within these Market Alerts is provided for general market awareness and informational purposes only. It does not constitute financial, legal, investment, regulatory or insurance advice. Whilst every effort has been made to ensure accuracy at the time of publication using multiple reputable and independently verified sources, geopolitical events, legislation, regulation and market conditions may change rapidly. Readers should obtain appropriate professional advice before acting upon any information contained herein.

Invictus Risk Solutions LLP – Helping organisations stay ahead of emerging risks through informed insight and independent analysis.