A new report from the Business Development Bank of Canada (BDC) and The Icebreaker, an SME defence innovation network, highlights significant barriers for small- and medium-size enterprises (SMEs) trying to enter Canada's defence industry. The report, released Thursday, identifies a "three-speed" growth divide among companies in the sector and calls for action to help SMEs overcome challenges such as long sales cycles, cash flow difficulties, and complex certification requirements.
Three Categories of SMEs
The BDC surveyed 642 business owners and decision makers active in the defence sector. Companies were categorized into three groups: defence-heavy and actively growing; defence-light and expanding cautiously; and those in "exploration mode" interested in joining the sector. Each group faces unique challenges depending on their level of involvement.
High Barriers for New Entrants
Peter Dawe, BDC's vice-president of defence strategy and a retired major-general in the Canadian Armed Forces, noted that SMEs make up 92 per cent of businesses in the defence sector and account for 40 per cent of employment. However, companies new to the sector face the steepest barriers. "If you're new to the defence business, it can appear pretty daunting," Dawe said. "It's hard to decipher. And the hurdles to gain access seem pretty significant."
Common Challenges
While each group faces distinct issues, common challenges include meeting defence-specific requirements. The report found that 29 per cent of defence-light firms and 28 per cent of defence-heavy firms said meeting such requirements is limiting their growth over the next 12 months. Key requirements include cybersecurity certifications and security clearances, which are difficult to obtain as military technologies evolve.
Access to Capital
Accessing capital is another major hurdle. Financial institutions remain cautious due to the sector's risk profile, limited customer base, and unstable cash flows. Half of defence SMEs seeking financing in the next 12 months expect it to be difficult, according to the survey.
BDC's Role
Dawe emphasized BDC's advisory role in "demystifying" the procurement process for SMEs. "Having a better understanding of what those requirements are and proactivity by SMEs is especially important because you don't want that to be the constraint," he said. BDC is pursuing a "matchmaker initiative" to source SMEs and connect them with government defence projects, aiming to help businesses navigate the complex defence ecosystem.
