SMEs to the Front Line - An Engine for Growth in the UK
Small and Medium-sized Enterprises (SMEs) are moving towards the front line of defence procurement, backed by a £400m innovation fund, 10% of the Ministry of Defence’s (MoD) equipment budget directed towards innovative tech and defence spending set to rise to 2.5% of GDP by 2027.
The 2025 Strategic Defence Review brings SMEs out of the supply chain trenches, recommending simplified procurement, accelerated delivery, and reducing barriers that favoured large primes, creating space for SMEs to scale and become strategic contributors to the UK Defence ecosystem.
The “Engine for Growth” package is driving defence innovation at “wartime pace.” Procurement timelines have been slashed: major platforms from six to two years, system upgrades from three to one, and off-the-shelf tech in quarterly cycles. The new UK Defence Innovation organisation consolidates multiple innovation bodies into a single agile command, fast-tracking innovation and capabilities. The Tech Scaler digital marketplace gives SMEs streamlined access to defence buyers with pre-approved enterprise agreements covering AI, software, and autonomy. The Defence Industrial Joint Council coordinates public-private investment strategies. Already, 461 MOD-backed SMEs have attracted nearly £600 million in private investment. Recent examples include Cook Defence’s £125m Challenger 3 spare tracks contract and Roke’s £251m six-year STORM missile defence research deal.
The Defence Innovation Loan Scheme offers low-interest, government-backed loans of £250,000–£2m to SMEs, bridging the “valley of death” between prototype development and deployment. Repayments are deferred until commercialization milestones, allowing product development focus without cash flow pressure. This enables pursuit of high-technical-risk innovations often excluded by commercial finance, accelerating the transition from concept to deployment.
Private investment in UK defence tech is increasing. Specialist UK-based venture capital funds have emerged focused on defence and startups evaluated for dual-use technologies, providing seed and Series A/B financing, while pension and sovereign wealth funds invest via infrastructure-style investments. Attraction stems from innovative investment vehicles supported by government guarantees, long-term contracts and government-backed procurement pipelines that offer revenue visibility, reduce perceived risks and encouraged scaling of startups.
Legacy barriers remain. SMEs still face complex procurement and export licensing, security requirements, mandated certifications, KPI monitoring, and supplier exclusions.
Government-backed loans reduce risk but do not guarantee returns. Critical questions for investors include: How will contract timelines and MOD funding cycles affect liquidity and exit strategy? How limited is the risk? How reliable are government pipeline forecasts in practice?
Overcoming these barriers requires operational agility, robust governance, financial readiness and broad legal support.
