Key Takeaways
- Canada plans to invest billions over the next decade to rebuild its military and reduce reliance on the United States.
- A large number of small and medium‑sized businesses (SMBs) already possess defence‑relevant capabilities, but few successfully convert that potential into defence contracts.
- The BDC‑Icebreaker report identifies financing, hiring, complex procurement, and defence‑specific regulations as the primary barriers for SMBs entering the sector.
- Existing defence‑focused SMBs are scaling but often operate at or near capacity, making additional funding difficult to obtain.
- Many SMBs with only a minor share of defence revenue see growth opportunities yet remain cautious due to economic uncertainty and unpredictable demand.
- A substantial pool of 374 defence‑adjacent firms (in construction, IT, manufacturing, etc.) faces the steepest hurdles to entry, despite strong interest.
- Industry leaders argue that Canada must create a clearer, faster “on‑ramp” for these businesses—streamlining compliance, financing, and procurement—to meet its ambitious defence targets.
Canada’s defence investment plans and strategic context
After years of underinvestment relative to its NATO allies, the Government of Canada has committed to pouring billions of dollars over the next ten years into modernising its armed forces and strengthening domestic defence capabilities. The strategic aim is twofold: to lessen the country’s dependence on the increasingly volatile United States for defence supplies and to stimulate home‑grown economic growth by leveraging Canadian industry. This renewed funding surge creates a sizable market opportunity for suppliers, but realizing it hinges on the ability of Canadian businesses—particularly small and medium‑sized enterprises—to actually win and fulfil defence contracts.
Defence‑capable SMB landscape in Canada
Canada is not lacking in defence‑ready small businesses. Across the country, numerous SMBs possess the technical expertise, manufacturing capacity, or IT solutions that align with defence requirements. Many of these firms are eager to participate, seeing the sector as a stable, high‑value customer base that can diversify their revenue streams. Yet eagerness alone does not translate into contracts; structural obstacles prevent a large portion of this capable base from moving from interest to active participation in defence supply chains.
Quote from Matt Lombardi on the conversion problem
Matt Lombardi, co‑founder and CEO of The Icebreaker, succinctly captures the core issue: “Canada has absolutely no shortage of defence‑capable small businesses. What we have is a problem with conversion.” His observation highlights that while the pipeline of qualified firms exists, the journey from capability to contract is fraught with impediments that deter even the most motivated entrepreneurs. The bottleneck, he argues, lies not in the willingness of business owners but in the systemic hurdles that have been erected around defence procurement.
Findings of the BDC‑Icebreaker report
The report, produced jointly by the Business Development Bank of Canada (BDC), The Icebreaker, and market research firm Forum Research, surveyed 642 SMBs ranging from firms already active in defence to those merely exploring the sector. The sample was designed to capture a broad picture of the landscape, including companies that generate a majority, a minority, or none of their sales from defence work. This comprehensive approach allowed the researchers to pinpoint where the sector is thriving and where it remains inaccessible to many qualified businesses.
Current defence‑focused SMBs: scaling but capacity constrained
Among the SMBs that already derive the bulk of their revenue from defence, the report finds a pattern of scaling growth. However, many of these firms are already operating at or near full capacity, limiting their ability to take on additional work without significant investment. When asked about financing, half of the defence‑oriented firms seeking capital indicated that obtaining it would be difficult or very difficult. Lenders remain cautious, citing the sector’s perceived risk profile, relatively narrow client base, and the irregular cash‑flow patterns that often accompany defence contracts.
SMBs with partial defence revenue: cautious expansion
A larger segment of surveyed SMBs earns only a minority of their income from defence but expresses interest in expanding that share. These companies acknowledge room to grow within the sector yet are proceeding cautiously. Ongoing macro‑economic uncertainty, combined with a lack of predictable, steady demand from defence contracts, makes them hesitant to invest in new capacity or retool existing operations. For these firms, the perceived risk of over‑extending themselves outweighs the potential upside of a deeper defence footprint.
Large pool of defence‑adjacent SMBs seeking entry
Perhaps the most striking finding is the sizable cohort of 374 SMBs that currently have little to no defence revenue but are actively looking to enter the market. These firms span industries such as construction, information technology, and manufacturing—sectors where many of the skills and technologies needed by the defence establishment already exist. Despite their readiness, they confront the steepest challenges: securing appropriate financing, deciphering complex government compliance requirements, and identifying a clear entry point that aligns with their capabilities and the defence procurement timeline.
Lombardi’s concerns about the defence‑adjacent cohort
Matt Lombardi is particularly worried about this defence‑adjacent group, arguing that their successful integration will be “very” important if Canada hopes to meet its ambitious defence targets over the next decade. He reiterates that the pipeline of capable firms is present, but the obstacle course—spanning compliance, financing, and procurement—remains overly convoluted and expensive for newcomers. “The bottleneck is not from the business owners—it’s this obstacle course that we’ve created from capability to contract,” Lombardi warned, urging policymakers to simplify and accelerate the path to contract award.
BDC chief economist Pierre Cléroux on interest versus readiness
Echoing Lombardi’s concern, BDC chief economist Pierre Cléroux acknowledged the strong interest from SMBs outside the defence sector but stressed that a considerable gap remains before they can meaningfully participate. “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. Cléroux emphasized that the forthcoming federal investments will only translate into broad‑based economic impact if the barriers preventing entry are systematically lowered.
Implications for investors, lenders, and federal action
The report is intended to give Canadian investors and lenders a clearer map of where the gaps lie in the nation’s defence readiness strategy. By highlighting specific pain points—such as difficulty obtaining capital, the complexity of defence‑specific regulations, and the unpredictable nature of demand—it equips financial institutions to tailor products and risk‑assessment models that better serve defence‑aspiring SMBs. Moreover, the findings reinforce the call for Ottawa to move faster: streamlining procurement timelines, offering targeted loan guarantees or credit facilities, and providing clear guidance on compliance could transform the current “murky path” into a reliable on‑ramp for domestic suppliers.
Conclusion and call to action
Canada’s defence revitalisation effort holds tremendous promise for boosting national security and stimulating domestic industry. However, the promise will remain unfulfilled unless the country addresses the conversion problem identified by industry leaders. A coordinated effort—combining clearer procurement processes, accessible financing options, regulatory simplification, and proactive outreach to defence‑adjacent SMBs—is essential. By lowering the barriers that currently keep capable small businesses on the sidelines, Canada can turn its vast latent defence capacity into an active, resilient component of its national security strategy, delivering both strategic independence and inclusive economic growth.