Canada has plenty of small and medium-sized businesses (SMBs) that want to meet its defence needs, but a new report from the Business Development Bank of Canada (BDC) and The Icebreaker says many are struggling to break into the sector.
After years of underinvestment compared to its allies, the Government of Canada plans to pour billions over the next decade into remaking the country’s military and shoring up its in-house defence capabilities. The feds want to reduce the country’s reliance on its increasingly volatile southern neighbour, the United States, while spurring domestic economic growth.
Matt Lombardi,
“Canada has absolutely no shortage of defence-capable small businesses. What we have is a problem with conversion.”
The Icebreaker
The BDC-Icebreaker report, released on Thursday, digs into how Canadian SMBs are navigating this shift. The Crown corporation and defence innovation network found that many still face significant barriers entering and growing in the defence sector: challenges securing capital, hiring, navigating complex procurement processes, and meeting defence-specific regulatory requirements.
“We’re asking some proven suppliers to sprint while they’re already operating near capacity, and then we’ve got a lot of firms that can help, but the path into defence is extremely murky, and in a lot of ways, it’s too expensive for newcomers,” Icebreaker co-founder and CEO Matt Lombardi told BetaKit in an interview.
BDC, The Icebreaker, and market research firm Forum Research surveyed 642 SMBs, ranging from companies already active in defence to ones looking to enter the sector.
The small group of SMBs that generate the majority of their sales from defence is scaling, the report found, but many are already operating at or near capacity. Half of the defence firms seeking funding expect it to be difficult or very difficult to obtain, with many financiers still cautious about defence’s risk profile, limited client base, and unstable cash flow.
The larger share of SMBs with a minority of their revenue from defence also said they see room to grow in the sector, but are expanding more cautiously amid continued economic uncertainty and a lack of a predictable enough demand to justify a shift in capacity.
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The report also identified a large pool of SMBs looking to enter the defence market: 374 firms across areas like construction, information technology, and manufacturing. It found this cohort faces the steepest challenges moving into defence, from securing financing to figuring out how to satisfy steep government requirements and determining the right entry point.
Lombardi is most concerned about this group, which he expects will need to play a “very” important role if Canada hopes to meet its ambitious defence targets.
“Canada has absolutely no shortage of defence-capable small businesses,” he said. But while the pipeline is there, in order to bring those “defence-adjacent” SMBs into the fold and turn them into trusted suppliers, Lombardi said Canada still needs to implement a much clearer path through compliance, financing, and procurement.
“What we have is a problem with conversion,” he said. “The bottleneck is not from the business owners—it’s this obstacle course that we’ve created from capability to contract.”
BDC chief economist Pierre Cléroux echoed the need to address these barriers. “There’s a lot of interest from [SMBs] that are not in the sector, but there’s a long way to go before they are able to [participate],” he told BetaKit in an interview.
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“We are at the beginning, so I’m not worried about it, but it means there’s a lot of work to do to make sure that all these investments that are going to be made are going to impact Canadian businesses,” Cléroux said.
Lombardi hopes this report gives Canadian investors and lenders a clearer idea of where the gaps exist in Canada’s defence plans. This includes BDC, which the feds have tapped to play a major part in delivering them.
The Icebreaker CEO said the feds have said the right things and made a lot of progress towards addressing these constraints, but argued that Canada needs to move much faster.
“If Ottawa really wants domestic capability this decade, they’ve got to make the on-ramp easier for small businesses,” he added.
Feature image courtesy Mark Carney on X.