Defense Industry Working Capital Insights: Scaling Up Production in a Dynamic Environment

Amid rising global geopolitical tensions and accelerated defense spending, the defense sector faces significant challenges in scaling up production to meet surging demand. This article highlights the financial, working capital, and supply chain pressures confronting defense companies, emphasizing the critical need for innovative solutions. This report explores how efficient working capital management, leveraging traditional trade finance, accounts receivables finance, and supply chain finance, can help address these complexities and position companies for success in a dynamic environment.

Key Highlights:

• Global defense spending reached an unprecedented $2.44 trillion in 2023, with projections for further increases in 2025 as NATO countries pledge to raise defense spending to 5% of GDP by 2035.
• Defense companies encounter significant hurdles in scaling production, including high expansion costs, constrained supply chains, strict compliance requirements, and lengthy order backlogs which extend up to seven years for some OEMs.
• The aerospace and defense sector experiences longer Cash Conversion Cycles and Days Sales Outstanding compared to other industries, indicating lengthy timeframes for cash realization and payment collection.
• Trade finance and working capital solutions such as Supply Chain Finance (SCF) programs, Dynamic Discounting (DD), Purchase Order (PO) financing, and Accounts Receivables (AR) finance are crucial for injecting liquidity and improving financial resilience across the defense supply chain.
• Core trade instruments like guarantees and standby Letters of Credit (LCs) are an effective and efficient solution for defense companies when performing a government contract.
• Export Credit Agency (ECA) finance is vital for supporting the manufacturing expansion of defense companies during this period of increased demand.

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