Euronews report highlights funding hurdles for European defence SMEs

A recent Euronews report by journalist Alice Tidey highlights a growing tension within the European defence ecosystem: while the EU urges defence companies to ramp up production to meet rising security needs, small and medium-sized enterprises (SMEs) still face significant roadblocks when it comes to securing financing.

The article explores the disconnect between high-level political ambition and the everyday reality for companies operating in Europe’s defence sector, especially its smaller players.

Despite a 30% increase in EU member states’ defence spending between 2021 and 2024 – reaching an estimated €326 billion – and a 16.9% rise in sector turnover to €158.8 billion in 2023, many SMEs remain locked out of crucial financial services due to the application of environmental, social and governance (ESG) rules.

Because defence is not explicitly classified as sustainable under the EU’s taxonomy, ESG standards can lead to defence companies being excluded from financing or essential services. The result? Some banks and service providers refuse to offer loans, accounts, or even energy contracts to defence firms – or their suppliers.

“Their local banks often refuse giving them bank accounts or loans if they supply us,” a representative of a large European weapons manufacturer told Euronews. “That’s an issue because we might not get any notice about why a certain supplier stops supplying us with screws, for example.”

The challenge is particularly acute for defence startups. Xavier Pinchart, CEO and founder of Belgium-based Hiraiwa, told Euronews that raising capital in the sector is extremely difficult because “you need to raise more capital than another project for a single potential client in the longer term and that potential client is limited to maybe one, the state”.

Pinchart's company is finalising a prototype for a grenade-sized system to detect, track and identify drones. But he warned that grant schemes such as the European Defence Fund (EDF) involve a significant administrative burden which can be difficult for startups to manage. Instead, he praised a Lithuanian government initiative offering loan guarantees for defence and security companies as a more viable path. “It mitigates the ‘extra risk’ a private investor takes to invest in defence,” Pinchart said.

The report also highlights the stark transatlantic funding gap. Between January 2022 and July 2023, US venture capital and private equity firms made 80 deals in the aerospace, defence and security sector worth more than €2.2 billion. Over the same period, just nine such deals were made in the EU, totalling €32.7 million.

The European Commission’s recent White Paper on defence, alongside upcoming measures such as a Strategic Dialogue with industry and a European Armament Technological Roadmap, suggests that Brussels is listening. But the message from the sector is clear: without faster access to capital, SMEs may struggle to deliver on Europe’s strategic ambitions.

ASD continues to champion fair access to finance for defence SMEs, advocating for sustainable finance rules that do not unintentionally disadvantage the very companies essential to Europe’s security. Strengthening the European defence technological and industrial base requires sustained public investment and improved access to private capital – especially for high-potential innovators. With security and sustainability deeply interconnected, ASD advocates for decisive political and regulatory steps to ensure that defence and high-end security industries are fully supported in the new strategic environment.