Record defence spending, long production cycles. How can companies finance defence sector contracts?

A signed defence sector contract may secure work for many months, but it does not automatically fund its delivery. Materials, components, payroll, subcontractors, testing and contract security often need to be paid for much earlier. If the first substantial payment arrives only after a stage has been completed and accepted, the company must cover the cash gap that builds up in the meantime.

In 2026, Poland allocated PLN 200.1 billion to national defence through the state budget and the Armed Forces Support Fund plan. This represented 4.81% of projected GDP. The record figure creates opportunities not only for the largest defence manufacturers. Higher procurement activity may also involve component manufacturers, metalworking and electronics companies, dual-use technology providers, IT businesses, logistics and maintenance companies, and many other subcontractors. Source: Polish government information on the 2026 budget.

Higher public spending does not mean, however, that cash immediately reaches every company in the supply chain. Between signing an agreement and receiving payment, there is still production, delivery, quality control, acceptance and settlement. The longer and more demanding the project, the greater the share of costs that a company may need to fund in advance.

This is why a defence sector contract requires answers to two separate questions:

Is the project profitable?
Does the company have enough cash to take the project through to payment?

A positive answer to the first question does not guarantee a positive answer to the second.

The defence sector includes much more than weapons manufacturers

Defence industry contract financing is not limited to companies that produce complete military equipment. Prime contractors rely on extensive supply chains that include businesses which may also operate in civilian markets.

Defence sector orders may require, among other things:

metal, composite and rubber components
electronics, optics, cabling and communication systems
software, cybersecurity and data analytics
machinery, tools, workshop equipment and production lines
clothing, protective equipment, field equipment and medical supplies
transport, storage and logistics services
construction, upgrades and maintenance of infrastructure
research, testing, certification, maintenance and training

The European Defence Industry Programme for 2026-2027 provides EUR 1.5 billion in support. Within it, EUR 100 million under the FAST instrument is intended to provide equity support to start-ups, SMEs and small mid-cap companies operating in defence supply chains. This shows that the expansion of the sector is expected to include smaller and technology-focused businesses, not only the largest industrial groups. Source: European Commission.

From a liquidity perspective, the company's role in the contract matters more than the industry label alone. A prime contractor settling directly with the contracting authority is in a different position from a subcontractor waiting for payment from a larger partner.

Company's role	Typical expenses before payment	When the receivable arises	Main liquidity risk
Prime contractor	Materials, production, subcontractors, testing, guarantees and logistics	After completion and acceptance of a stage or the entire delivery	Large cost base and delayed acceptance
Manufacturing subcontractor	Raw materials, components, labour, energy, tooling and quality control	After delivery to the prime contractor and acceptance of the batch	Limited control over the schedule of the wider project
Technology or service provider	Project team, licences, infrastructure, testing and implementation	After reaching a milestone or obtaining a signed acceptance certificate	Long period between completing work and receiving formal approval
Dual-use supplier	Product adaptation, research, certification and capacity expansion	According to the contract, often after meeting additional requirements	Cost of entering the supply chain before recurring orders begin

Why can a profitable contract put pressure on company liquidity?

The margin shows how much a company may earn from a project. It does not show when the cash will reach the bank account or how much the company must spend beforehand.

A business may sign a contract worth PLN 1.2 million and expect a margin of PLN 280,000. If it must spend PLN 620,000 before receiving the first major payment, it is this amount, rather than the expected profit, that determines whether the project is feasible from a cash perspective.

The funding gap in a defence sector contract may emerge in several places at once.

1. Materials and components must be ordered in advance

Some items have long lead times, require a minimum order quantity or are available from a limited number of suppliers. The company may therefore need to pay a deposit or the full price before its own production begins.

2. Production takes longer than a standard sales cycle

A project lasting several months ties up people, machinery, production space, energy and working capital. During this period, the company must still deliver other orders and meet its day-to-day obligations.

3. Invoicing depends on formal acceptance

Completing the work does not always mean that an invoice can be issued. The contract may require tests, documentation, a signed certificate, batch approval or completion of a defined milestone. Any delay in acceptance extends the period during which the company must finance the costs.

4. Part of the company's funds may be tied up in contract security

The contracting authority may require a bid bond, performance bond, advance payment guarantee or security for a warranty period. If the company provides cash security or must place a deposit to obtain a guarantee, its available working capital decreases.

5. A subcontractor depends on the prime contractor's procedures

A company may complete its own scope correctly and still wait for document verification, batch acceptance or payment approval by the customer. This is why the calculation should not rely only on the due date shown on the invoice. It should also include the time needed to reach the point at which the invoice may be issued.

How do you calculate the actual cash gap in a contract?

The most useful calculation does not begin with the value of the agreement. It begins by mapping every inflow and expense over time.

A simplified formula can be used:

Maximum cash gap = cumulative contract expenses + cash tied up in security + safety buffer - customer advances received - supplier credit used - stage payments received

Contract expenses should include more than materials and direct labour. The calculation should also cover:

production set-up and tooling costs
transport, storage and insurance
testing, quality control and documentation
subcontractor services
permit, compliance and certification costs, where relevant
financing and contract security costs
taxes and other expenses that arise before the customer pays
a reserve for price increases, corrections and delayed acceptance

Example: a contract worth PLN 1.2 million

Assume that a company has received an order worth PLN 1.2 million net. The planned delivery cost is PLN 920,000 and the expected margin is PLN 280,000. The contract provides for a PLN 120,000 advance payment, a PLN 250,000 stage payment and PLN 830,000 after final acceptance.

On paper, the project looks profitable. Only the cash schedule reveals how much money must be committed before final settlement.

Timing	Event	Cash flow in the period	Cumulative cash gap
Day 0	Advance payment received from the customer	+PLN 120,000	PLN 0
Days 1-30	Materials, components and production preparation. Suppliers defer PLN 100,000	-PLN 380,000	PLN 260,000
Days 31-75	Labour, energy, subcontractors and repayment of PLN 100,000 in supplier credit	-PLN 360,000	PLN 620,000
Day 90	Payment after acceptance of the first stage	+PLN 250,000	PLN 370,000
Days 91-135	Final work, testing, documentation and logistics	-PLN 180,000	PLN 550,000
Day 180	Final payment after acceptance and the agreed payment term	+PLN 830,000	Gap closed

The highest gap does not arise at the end of the project. It appears around day 75. At that point, the company needs PLN 620,000, even though it has a signed contract, has received an advance and expects a positive margin.

This maximum gap, rather than the total costs or the value of the agreement, should be the starting point for a financing discussion.

One schedule is not enough. Delays must also be calculated

A contract should not be assessed only under a scenario in which every delivery, inspection and payment takes place exactly on time. The company should prepare at least three variants:

base case - delivery proceeds according to plan
cautious case - acceptance or payment is delayed by 30 days
stress case - the delay is combined with higher costs or the loss of the expected advance payment

For our example, the difference may look like this:

Scenario	Change from the plan	Estimated maximum cash gap	What the company should check
Base case	All acceptance events and payments follow the schedule	PLN 620,000	Whether available capital covers the gap without disrupting normal operations
Delayed stage acceptance	The PLN 250,000 payment arrives after a further PLN 180,000 of costs has been incurred	PLN 800,000	Whether the financing also covers the delay period
No advance payment	The company does not receive PLN 120,000 at the beginning	PLN 740,000	Whether the contract terms can be renegotiated before work begins
Stress case	No advance payment, delayed stage acceptance and a PLN 54,000 increase in material costs	PLN 974,000	Whether the margin remains positive and the project stays within a safe scale

If a contract is feasible only under a perfect scenario, the risk may be too high. Financing should cover a predictable gap, but it cannot replace a realistic margin or repair a contract whose terms are unfavourable from the start.

For more on assessing a project before signing, read Can your company afford a larger contract? What to calculate before signing the agreement?.

What can a company improve before using external financing?

External capital does not have to be the first or only way to close the gap. Sometimes the funding requirement can be reduced by changing the commercial terms.

An advance payment from the customer

An advance can help cover project launch costs. The company must still check whether the payment requires an advance payment guarantee and how that security will affect its available limits.

Payments linked to genuine milestones

The longer the company waits for the first settlement, the more capital it must provide. Dividing the contract into design, prototype, first batch, testing and further deliveries may reduce the peak gap. The milestones should correspond to stages that can be clearly documented and accepted.

Supplier credit

If a component supplier agrees to payment after 45 or 60 days, part of the expense moves closer to the customer's payment. The company should still avoid a situation in which all supplier liabilities fall due immediately before a potentially delayed acceptance event.

Splitting purchasing and production into batches

Buying the full volume at the beginning may reduce the unit price, but it also increases cash tied up in stock and inventory risk. Batch production may sometimes be safer, even if the unit cost is slightly higher.

A reserve outside the project budget

A company should not commit all its cash to one contract. Payroll, taxes, other orders and unexpected failures still need to be funded. The contract reserve and the general liquidity buffer serve different purposes and should be calculated separately.

If you want to analyse money tied up in materials, work in progress and receivables in more detail, see Cash tied up in production. How should industrial companies calculate their capital needs?.

How should financing be matched to the stage of the contract?

There is no single product that suits every defence sector company. The choice depends primarily on whether the business is only beginning to incur costs, already has a signed contract, has issued an invoice, or needs to expand production capacity over a longer period.

Company's situation	Solution to consider	Typical source of repayment	Main question
The company has a signed contract, but invoices will arise only at later stages	Contract financing	Future receivables arising from the agreement	Whether the contract permits assignment and the counterparty will confirm it
The delivery has been accepted and the invoice issued, but payment is deferred	Invoice financing or factoring	Payment of the specific invoice	Whether the receivable is undisputed and assignable
The company is financing several orders and needs capital for broader growth	Business loan or working capital facility	Cash flows from the entire business	Whether repayments match real cash flow rather than average revenue alone
A larger amount is needed for a longer project or investment	Real estate secured financing	Company cash flows and the agreed collateral	Whether the scale and duration of the need justify using the property as security
The company is expanding capacity, developing a dual-use product or making a strategic investment	Public programme, guarantee, investment loan or equity	Investment outcomes and long-term cash flows	Whether the instrument covers investment, working capital or both

In 2026, Bank Gospodarstwa Krajowego expanded its instruments for defence and dual-use businesses. Special de minimis guarantee terms may cover up to 80% of loan principal for licensed defence activity and up to 70% for manufacturers of dual-use goods. Poland also launched the Security and Defence Fund, which is intended to support projects including production capacity expansion and initiatives that strengthen national resilience. Detailed conditions, availability and application dates should always be checked in the latest BGK materials: support for dual-use projects and investments.

These programmes may be valuable, but they solve a different need from rapid financing of a specific contract. A company may need capital for a new production line and, at the same time, working capital for materials used in the first batch. These two gaps should not automatically be combined in one product.

Defence sector contract financing at PaveNow

At PaveNow, contract financing is based on a signed B2B agreement and the assignment of receivables arising from it. It may cover multiple invoices under one contract, including invoices that will be issued at later stages of delivery.

The current main product parameters are:

financing from PLN 50,000 to PLN 2 million
contract financing term of up to 12 months
financing of up to 100% of the net value, while the final advance depends on the assessment of the transaction, the company and the counterparty
disclosed assignment of receivables confirmed by the counterparty
financing with recourse

For a defence sector contract, the possibility of financing must be assessed individually. What matters is not only the industry, but also the subject and structure of the agreement, the counterparty, settlement schedule, assignability, delivery status, required licences and permits, and compliance with legal and internal procedures.

If the agreement contains a non-assignment clause or requires the consent of the contracting authority or prime contractor, receivables-based financing should not be planned until this issue has been resolved. For more about this process, see How to get your contractor's consent for the assignment of receivables in factoring.

The complete current product terms are available on the B2B invoice and contract financing page.

What will a financing provider check before making a decision?

A signed agreement is important, but it is not enough to assess the financing. The financing provider needs to understand how the receivable will arise and how it will be paid.

The company

The assessment may include operating history, turnover, results, debt, bank account cash flows, payment discipline, liabilities to the Polish Social Insurance Institution and tax office, and experience in delivering similar projects.

The contract

The value, scope, schedule, milestones, acceptance terms, invoicing dates, penalties, price adjustment rules, termination rights, retention amounts and assignability of receivables may all be relevant.

The counterparty and the company's place in the supply chain

A direct receivable from a public contracting authority is assessed differently from a subcontractor's receivable from a prime contractor. The counterparty's financial position, previous cooperation and the events that trigger its payment obligation are all important.

The cash budget and schedule

The financing provider should understand how the money will be used, when the largest expenses arise and which inflow will repay the financing. A budget without dates does not reveal the gap. A schedule without costs does not reveal the amount required.

Formal and regulatory risks

Depending on the activity, relevant matters may include licences for the manufacture or trade of military or police goods, permits concerning strategic goods, classified information requirements, sanctions, export controls and restrictions connected with the specific buyer and delivery destination.

Not every business in a defence supply chain needs a licence. A standard packaging manufacturer, an IT service provider and a weapons manufacturer operate under different regulatory regimes. The company should determine its obligations for the specific product and transaction. Information about activities that require a licence is available through Biznes.gov.pl.

What documents should be prepared for a financing discussion?

A well-prepared document package speeds up the assessment and reduces the risk that the financing provider will form an oversimplified view of the transaction.

The required documents will typically include:

the signed contract, order and amendments to the extent that they may lawfully be disclosed
the delivery, acceptance, invoicing and payment schedule
the cost budget broken down by date
information about advances, stage payments, retention and contract security
quotations, orders or invoices from key suppliers and subcontractors
certificates, evidence of completion or other proof of progress if the project is already under way
company financial documents and bank account history
information about other liabilities and contracts delivered in parallel
consent to assignment or confirmation that the agreement permits it
licences, permits and compliance confirmations where relevant to the transaction

In the defence sector, some documentation may be confidential, contractually protected or subject to classified information rules. A company should not send classified information or sensitive technical data through ordinary channels simply because it is applying for financing. The parties should first agree on a secure and legally compliant scope of documents required for the assessment. In some cases, anonymised summaries, a financial schedule and confirmation of key terms by the counterparty may be sufficient.

Key risks that should be included in the contract and cash flow analysis

Acceptance is not a formality

If payment depends on passing tests, the company should know how much time the customer has for verification, who signs the acceptance certificate and what happens when comments are raised. The cost of corrections and repeated acceptance should also be calculated.

A penalty can change both the margin and the source of repayment

A contract with a healthy expected margin may become unprofitable after penalties for delay, failure to meet a required parameter or missing documentation. The liability cap, the method of calculating penalties and whether they can be combined should be assessed before costs are incurred.

Material prices may change before delivery

For a long production cycle, the purchasing currency, price indexation, validity of supplier quotes and availability of substitutes all matter. If the customer price is fixed but the cost of a key component is not, the contractor may carry the entire risk.

One contract should not deprive the company of its ability to operate

A large order may represent a substantial share of future revenue while also consuming most of the company's people and cash. The business must check whether a delay in one payment could stop the rest of its operations.

The repayment source must be capable of materialising

It is not enough to point to the high value of the contract. The receivable must actually arise, be capable of documentation and, for assignment-based financing, be transferable. If consent from the counterparty is uncertain, an alternative financing route should be prepared earlier.

When will contract financing not be the right solution?

Financing can help cover a temporary gap between costs and a predictable inflow. It should not be used to hide an unprofitable project or uncertainty about the order itself.

Particular caution is needed when:

the company does not yet have a signed contract or binding order
the budget omits some costs, contract security or taxes
the margin disappears after a small price increase or short delay
acceptance depends on conditions that the company cannot yet meet
repayment requires consent to assignment that the counterparty is unwilling to provide
the company lacks the required licences or permits
the project consumes all available cash and leaves no buffer for day-to-day operations
the financing ends before the realistic acceptance and payment date
repayment depends on another contract that has not yet been signed

In these situations, additional capital may only postpone the problem and increase the project cost. The contract terms, scope, price, schedule or payment structure should be improved first.

How should a defence sector contract be prepared for financing?

The best time to analyse financing is before purchasing begins. At this point, the company should:

Prepare a complete contract budget, including indirect costs and a reserve.
Place every expense, acceptance event, invoice and inflow on a timeline.
Calculate the maximum gap under the base, cautious and stress cases.
Check the assignment, stage payment, security and penalty provisions.
Separate the capital needed to deliver the contract from the money required to invest in production capacity.
Compare contract financing, invoice financing, a working capital loan, secured financing and available public programmes.
Match the repayment date to the realistic acceptance and payment date, not only the date shown in an optimistic schedule.

If the company begins production first and only starts looking for money later, its position is weaker. Suppliers expect payment, time begins to work against the business and the opportunity to renegotiate contract terms becomes limited.

Summary

Higher defence spending creates opportunities for Polish manufacturers, technology companies and subcontractors. A contract alone does not, however, provide the cash required to deliver it. The longer the production cycle, the more complex the acceptance process and the later the payment, the more capital the company needs to commit in advance.

This is why the company should calculate not only the margin, but also the maximum cash gap before starting delivery. The model should include costs, contract security, acceptance dates, stage payments, supplier credit and a reserve for delays.

Well-matched financing can connect the timing of expenses with the timing of inflows and allow a company to deliver a profitable order without tying up all its day-to-day cash. It still requires a clear contract, realistic budget, documented schedule and credible source of repayment.

Sources and further reading

This article is for educational purposes only and does not constitute legal or tax advice or an offer of financing. The availability and terms of financing depend on an individual assessment of the company, the counterparty, the documents and the transaction.

Do you have a signed defence sector contract, but costs arise before the first payment?

Prepare the agreement, delivery schedule and cost budget. We will assess individually whether contract or future invoice financing can be matched to your transaction.

Explore contract financing

FAQ - defence sector contract financing

What is defence sector contract financing?

Financing gives a company access to part of the funds arising from a signed contract before the counterparty makes payment. It may help cover materials, labour, subcontractors, testing or logistics. The exact mechanism depends on the product, the agreement, the schedule and whether receivables can be assigned.

Is financing available only to weapons manufacturers?

No. Defence supply chains also include component manufacturers, technology companies, dual-use businesses, electronics suppliers, logistics providers, infrastructure contractors, maintenance companies and other service providers. Each transaction still requires an individual assessment of the contract subject, counterparty, regulations and source of repayment.

How do you calculate the amount needed to deliver a contract?

Every expense and inflow should be placed on a timeline. The maximum gap includes cumulative costs, cash tied up in contract security and a safety buffer, less advances, supplier credit and stage payments already received. The company should also calculate delayed acceptance and cost increase scenarios.

Is a signed contract enough to obtain financing?

No. The financing provider will also assess the company, project budget, margin, schedule, acceptance and invoicing terms, counterparty, assignability, required licences and the realistic source of repayment. A high-value document alone does not determine whether financing is available.

Can a contract be financed before an invoice is issued?

This may be possible when the company has a signed B2B agreement that creates future receivables which can be documented. At PaveNow, full contract financing may also cover invoices issued at later stages. The counterparty must confirm the disclosed assignment of receivables.

What if the contract contains a non-assignment clause?

Assignment-based financing will then require the counterparty's consent or a different financing structure. A company should not assume that consent will be granted after the project has already started. The issue should be checked and resolved before substantial costs are incurred.

How does contract financing differ from factoring a single invoice?

Single invoice financing begins after the invoice has been issued. Contract financing may cover multiple receivables under one agreement, including those arising at later stages. In both cases, the company should check assignment and acceptance terms and its liability if the counterparty does not pay.

Can a dual-use company apply for financing?

Yes. Companies developing or manufacturing dual-use products and technologies may use various forms of commercial and public financing. Availability depends on the product, transaction, buyer, required permits and the criteria of the financing provider or programme.

How does delayed acceptance affect financing?

Delayed acceptance postpones invoicing or payment while the company continues to incur costs. Financing should include a realistic time buffer. If repayment falls due before the contract proceeds can realistically arrive, even a profitable project may create another cash gap.

When will contract financing be unsafe?

Financing may be unsafe when the contract has an insufficient margin, acceptance is highly uncertain, the company lacks required permits, assignment is impossible, costs are underestimated or repayment depends on another order that has not been signed. External capital cannot repair an unfavourable agreement.

Paulina Chmielewska

B2B marketing, SEO and product communication specialist focused on turning complex finance and technology topics into clear, business-oriented content for companies.