By Michael Kahn and Jan Lopatka
PRAGUE (Reuters) – Europe’s small and medium-sized defence companies are struggling to access finance needed to drive innovation and grow production lines even as demand soars due to the war in Ukraine and other conflicts, government officials, firms and experts say.
A lack of access to public funding, red tape and banks’ reluctance to lend on fears of falling foul of environmental, social and governance regulations (ESG) are all hindering growth for smaller players in Europe’s defence sector, they say.
This as global military expenditure hit an all time high of $2.44 trillion in 2023, up 6.8% from the prior year and the most since 2009, according to the Stockholm International Peace Research Institute.
“Most of the problems that have existed in recent times for the defence and security industry have continued or deepened,” Defence and Security Industry Association of the Czech Republic Managing Director Jiri Hynek told Reuters.
One small firearms maker told Reuters a cash crunch makes it difficult to sell products in Europe, or take part in government tenders.
This makes it hard to expand and problematic from a cash-flow point of view, the company’s founder and chief executive said, declining to name his firm due to the sensitive nature of dealing with local banks.
“It is very difficult to sell products to governments in Europe because I can’t get a down payment. If I want to supply the Czech government they will pay me 30 days after delivery so it makes things really expensive,” he said.
Reuters spoke to around a dozen companies, government officials and experts in the defence sector, who all said European governments need to tackle how to improve access to financing for smaller companies.
A 2024 European Commission report estimated small- and medium-sized enterprises (SMEs) in the EU’s defence sector faced a debt financing gap of between 1 billion euros ($1.08 billion) to 2 billion euros, crimping business growth, forcing firms to reduce operations and search for funding outside the European Union.
Overly stringent and cautious interpretations of ESG criteria often result in exclusion policies by banks and investment funds in the EU, the report said, adding that providing clarity to the financial sector on how to address sustainability risks could improve access to financing.
“In a sector defined by long development cycles and large capital requirements, a lack of funding can hamper a company’s ability to innovate, expand, or even maintain its current operations,” the report found.