UK defence suppliers tap fintechs to scale up production

Britain’s defence sector is turning to small fintech lenders for funding after struggling to secure backing from traditional banks, highlighting one of the challenges of meeting government targets to raise military spending.

Defence groups will on Monday meet fintechs OakNorth, Funding Circle, Allica Bank, Iwoca, Liberis and Simply Asset Finance, to try to persuade them to invest more and to outline some of the funding challenges they face, according to an email seen by the Financial Times.

Luke Charters, the parliamentary private secretary for the Department for Business and Trade, will also attend the meeting, which has been arranged by the fintech trade association, Innovate Finance.

“[Smaller defence firms] are being asked to increase their output and many have said they need more debt finance to farm their growth. However, in recent years these supply chain SMEs have found it difficult to access finance because the defence sector has been sidelined by many lenders,” the message said.

It added that some defence companies previously had bank accounts closed because of their involvement in the sector.

Defence groups are under pressure to boost their capacity. The UK government has committed to increasing military spending to 2.5 per cent of GDP and has made defence a key sector in its industrial strategy.

However, smaller companies in particular have complained that ESG ethical lending rules can make it hard for them to secure financing. Larger firms have sometimes stepped in to bridge the gap, while some arms manufacturers have borrowed in private markets.

But Europe’s rearmament drive since the start of the war in Ukraine has forced a change of tack. The European Commission said in June it would clarify that defence companies complied with ESG criteria, while French bank BNP Paribas dropped a commitment that barred it from financing “controversial weapons” this year.

Aimie Stone, chief economist of UK defence industry lobby group ADS, said that while ministers had indicated that they would increase spending, that this had not yet translated into contracts.

“It is a great signal . . . But ultimately, without the contracts in place, there’s still a lot of nervousness. We’re having these conversations [with fintechs] to try to break through some of that in the absence of the contracts being in place.” She added that the discussions were an attempt to “de-risk” the sector for lenders.

The email added that separately the ADS had recently had a meeting with the British Business Bank, to discuss how the taxpayer-backed lender could help encourage investment in the sector and fill funding gaps for smaller firms.

Two people who were present at the BBB meeting said the bank now had more capacity for a programme to guarantee 70 per cent of the final loan losses. The aim is to encourage banks to lend to smaller defence companies.

Innovate Finance said: “We recognise that SMEs within the defence supply chain are being asked to significantly increase production to support the government’s industrial strategy.”

It added that it was “actively exploring with ADS how our members can help expand the supply of credit to these firms to finance this anticipated growth”.