How the Nordics are preparing for defence's next challenge: growth

During the past three or four years, Europe's rearmament story has been told through defence budgets, NATO spending targets and record order books.

But as the time for deliveries and order fulfilment has arrived the focus is shifting from the bigger lines to concrete production lines and supply chains.

- The large defence companies get huge orders, and they buy from hundreds of different sub-suppliers across Europe, including the Nordic countries, says Carl-Johan Karlsson, Head of SMEs and Mid-Corps at Sweden's export credit agency EKN.

Those suppliers are increasingly finding themselves at the centre of the defence industry's next challenge.

As military spending rises across the Nordic region, many smaller companies are being asked to expand production, hire staff and invest in materials long before revenues arrive.

- These companies are healthy as they are. They might even be growing. But with the rapid growth needed comes cash-flow constraints, Karlsson says.

It is a different problem from the one many defence suppliers faced just a few years ago.

Back then, the focus was on winning business from major contractors and positioning for an expected increase in defence spending. Today, the orders are arriving.

The challenge is turning demand into production.

Trickle down

According to Karlsson, the shift has happened remarkably quickly.

Before 2022, activity in much of the sector remained relatively subdued. Demand then began to build gradually before accelerating sharply as governments translated political commitments into procurement programmes.

- It was standing still in 2022. It increased in 2023. Then it exploded very fast in 2025, he says.

The consequences are now moving through the supply chain.

When a large defence company secures a major contract, the work rarely stays there. Orders spread through networks of manufacturers, engineering firms and specialist suppliers, many of which are small or medium-sized businesses, sometimes not even in the defence sector yet.

For some, growth itself becomes the challenge.

A supplier may need to purchase steel, components and equipment months before receiving payment. Others need additional staff or larger inventories to meet production schedules.

- Some of these companies might even double their turnover in two or three years, he says. 

- That puts a lot of pressure on the cash flow.

State-backed financing

Across the Nordic region, governments and state-backed financial institutions are increasingly adapting to the same reality: defence suppliers need capital long before they receive the full benefits of rising demand.

In Denmark, state-backed financier EIFO has identified supplier growth as a key area of focus and expects defence-related activity to increase substantially in the coming years. 

The institution has expanded its willingness to assume risk as suppliers seek financing to support larger contracts, Henrik Holst Elstrøm, head of mid-size at EIFO told Defence Nordic in a previous article.

Sweden's approach is somewhat different.

Unlike EIFO and also Finnish counterpart Finnvera, EKN does not provide financing directly. Instead, it works alongside commercial banks, helping them take on growth-related risk.

Typically, EKN assumes 50 per cent of the risk while the bank provides the financing and the remaining half of the risk.

The logic is straightforward.

Banks are generally comfortable lending to established businesses. They become more cautious when companies suddenly begin growing much faster than before.

That is precisely where EKN sees its role.

- The commercial banks are exactly that: commercial, Karlsson says. 

- They have shareholders and they need safe returns.