Canada’s planned increase in defence spending is creating opportunities for small and medium-sized businesses, but many firms face significant barriers in taking advantage of them, according to a new report from the Business Development Bank of Canada (BDC).

The report found companies interested in defence work face a range of obstacles, including difficulty accessing financing, labour shortages, complex procurement processes and regulatory requirements such as cybersecurity standards and security clearances. 

The findings come as the federal government prepares to sharply increase military spending over the next decade under its NATO commitments.

The Crown corporation worked with market research firm Forum Research and defence innovation network The Icebreaker to survey 642 businesses, including companies already active in defence and firms interested in entering the sector. The findings reveal an industry that is small and nascent. Nearly three-quarters of defence businesses surveyed said defence accounts for a minority of their revenue, while BDC identified a large pool of companies that are interested in defence but haven’t yet broken into the market. 

BDC chief economist Pierre Cléroux said the findings reflect an industry that’s just emerging in Canada and points to an opportunity for existing businesses in sectors such as manufacturing, aerospace and construction to expand into defence. “The idea is not to move totally to the defence industry,” he said. “It’s to benefit from this opportunity that we have right now and maintain what you already do for other sectors.”

Cléroux said defence may be particularly attractive for manufacturers experiencing weaker demand elsewhere in the economy, including firms affected by tariffs and slower growth in the auto sector.

For those already in the defence industry, access to capital was one of the biggest challenges to scaling. Among those looking for capital, 74 per cent hope to raise $1 million or more and 39 per cent are seeking at least $5 million. Nearly half of the businesses seeking financing expect it to be difficult or very difficult. 

Cléroux said he was surprised companies are still facing financing challenges, especially given the heightened interest from the public and private sectors to grow the defence industry. “Lenders are more cautious with that sector,” Cléroux told The Logic, adding that many financial institutions are unfamiliar with the sector and view it as higher risk. Long sales and production cycles are another barrier, Cléroux said. That dynamic ties up capital for extended periods before companies are paid, making the sector less attractive to lenders.

The biggest hurdle for companies looking to enter the market is often meeting defence-specific regulatory requirements, said Cléroux. Businesses cited certifications, cybersecurity standards and security clearances as among the main barriers to participation. 

BDC also found that some companies are struggling to keep pace with demand, which is only expected to grow. Twenty-one per cent of defence-focused businesses reported already operating at full capacity, and 30 per cent said they had difficulty recruiting qualified workers. For those reasons, most companies are planning to significantly increase their level of investment in the next 12 months.