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Starting a journey into the Australian defence sector presents exciting opportunities for small and medium-sized enterprises (SMEs) to contribute to Australia's security and achieve sustainable growth. However, navigating the financial landscape can be challenging, with potentially high research and development (R&D) costs, strict certification and regulatory requirements, and lengthy procurement timelines to contend with, any SME could be forgiven for finding this daunting. The key to success lies in the development of strategic solutions, and using all financial support that is available in this sector.
This blog serves as a guide to securing the funding to support your business on the long journey to success in Defence. We'll explore various funding avenues, government support mechanisms, and best practices for financial management, empowering you to make informed decisions and achieve your business goals, all the while delighting your new Defence customers.
Understanding the Financial Landscape:
To have a successful journey into the Australian defence industry you will require a clearly defined approach to your finances. If you're in the product space, there may be high R&D costs involved. This, along with with lengthy procurement and project timelines and the risks involved with changes of government policy, not to mention the multiple, stringent regulatory frameworks to comply with, necessitate seeking funding that aligns with your business strategy and goals for this customer segment.
Government Grants to Support Your Innovation
The Australian government actively supports the participation of SMEs in defence-related projects through a diverse range of grant programs. These grants provide crucial funding for research and development, prototype development, and even export assistance. Explore resources such as AusIndustry's website and your local state based defence support unit to identify relevant grants and ensure your application effectively communicates your project's benefits and aligns with program objectives.
One Defence specific source of grants is the Advanced Strategic Capabilities Accelerator (ASCA), who's purpose of being is to integrate and optimise Defence's innovation, science, and technology systems, accelerating the development and acquisition of new capabilities. Whilst this can be a source of funding for your SME, the way that ASCA works means that unless your business is pursuing something that is directly stipulated by them as a "mission," then you're not going to be eligible. Unlike it's predecessor the Defence Innovation Hub (DIH), there are no unsolicited applications allowed to ASCA.
Recently, the federal government discontinued significant defence grant programs such as Sovereign Industrial Capability Priority (SICP) grants, Defence Global Competitiveness (DGC) Grants and Skilling Australia’s Defence Industry (SADI). These were significant sources of financial support for SMEs to take part in Defence projects, however, a planned new grant program has been announced - the Defence Industry Development Grant program - due to start in mid-2024. We will update this post once the grant situation is updated by Defence.
Some grants that aren't dedicated purely to Defence are available, and are worth considering if you meet the criteria. Have a look at:
The National Reconstruction Fund (NRF)
A $15 Billion federal government fund providing co-investments to Australian businesses - not just in the Defence sector, but with Defence businesses as a priority funding area.
Cooperative Research Centres Projects (CRC-P) Grants
For industry lead, short-term research for the development of new technologies, products or services; grants are issued on a 'matched funding' basis from $100,000 up to $3 million.
Australia-US International Multidisciplinary University Research Initiative (AUSMURI)
Not specifically for small business, but for Australian Universities and higher educational institutions looking to engage in research relating to priority areas for future Australian Defence capabilities. Partnering with a University for R&D for your next Defence product innovation is a smart way to access this kind of funding indirectly.
The Research and Development Tax Incentive (R&D Tax Incentive or R&DTI)
Though not specifically a grant, it is a source of financing that can be highly beneficial to businesses in the Defence sector who often need to undertake significant research and development with high costs.
Diversified Funding Options
While government grants offer a valuable starting point, exploring a broader source of funding sources strengthens your financial resilience.
Consider the following options -
Venture Capital: Venture capital firms increasingly seek innovative defence solutions. Prepare a compelling pitch highlighting your market potential and robust financial projections to attract their interest. The two key VC firms supporting defence ventures in Australia are Beaten Zone Venture Partners and Periscope Capital Partners.
Loans and Debt Financing: Banks loans and lines of credit offer options suitable for Defence industry participants. Ensure your creditworthiness meets eligibility criteria and present a solid business plan demonstrating financial viability. As an SME you likely already have some debt financing as part of your financial structures, so it's worth considering your position when expanding into a new customer segment with Defence customers.
Strong Financial Management can Protect Your Business
Securing funding (or additional funding) might be the first step, but it's just the beginning of establishing a long-term, sustainable Defence venture. Just like any high quality Defence strategy, detailed financial management safeguards your business in times of uncertainty. In particular as an SME owner, the financial health of your business is the biggest factor in the ongoing viability of your company.
Firstly, implement strong budgeting practices. Treat your budget like a detailed blueprint, clearly outlining projected revenue, expenses, and resource allocation for each project phase. Regularly monitor budget adherence and adapt as needed to maintain financial stability. Strong financial management in this regard is highly valued by Defence customers and without it you may find it hard to be seen as a credible supplier.
Secondly, increase your proficiency in cash flow forecasting. Anticipate your company's future cash inflows and outflows with the highest degree of accuracy that you reasonably can. This foresight allows you to proactively manage potential shortfalls, identify financing needs early on, and capitalise on investment opportunities that arise. It's important to ensure you're doing the right level of forecasting for your business's size - don't overspend on this area as there are significantly diminishing returns.
Thirdly, leverage technology to your advantage. Explore financial management software designed specifically for Defence contractors, or other specific tools that can integrate into your existing financial management suite. These tools can create efficiencies in budgeting, automate tasks, generate useful reports, and simplify earned value management (EVM), empowering you to make data-driven decisions and optimise your business's financial performance. The days of using a spreadsheet for everything should be something you leave behind if you wish to excel (pardon the pun!) in the Defence industry.
The Power of Collaboration
While venturing into the Defence sector holds immense potential, the complexities can be daunting. Developing strategic partnerships to share the burden will amplify your chances of success. Imagine these partnerships as alliances, each bringing unique strengths and capabilities to the table. Be comfortable in the knowledge that even the industry giants like Boeing and Lockheed Martin use this tactic - no one company can "do it all."
Collaborations with universities and research institutions can provide access to cutting-edge technology, expert researchers, and valuable grant opportunities (as previously mentioned). Partnering with other businesses can expand your capabilities, share financial resources (and risks), and open doors to new markets.
Joint ventures (JVs) with established players in the Defence industry can offer excellent opportunities for mentorship, access to established supply chains, and increased credibility with potential clients. With that being said, establishing such a JV is not something that is simple nor quick; when thinking about a JV you have to have a rock solid understanding and ability to communicate the unique value you would bring to such a relationship with an already established Defence player. It's important to remind yourself that collaboration is not a sign of weakness, but rather a strategic move that can leverage collective expertise, resources, and networks, ultimately moving your venture towards a bigger, brighter, more successful future.
Rounding up
Thorough research and preparation are absolutely essential for securing the right funding for your Defence venture. Carefully assess your specific needs, explore the numerous funding options that are available, and create a compelling proposal that truly communicates your unique value proposition.
With the right guidance and a strategic approach, you can navigate the financial landscape and achieve your Defence industry aspirations.
If you're stuck and want to talk to someone about it, why not book a free consultation with us at AIC Connect?
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