Finance challenges in the defence and security sector – a way forward?

This blog was written by Harry Bengough,  Partner, Head of Banking and Finance Team at HCR law.

Since we first became involved with the defence and security sector many years ago, we have become aware of a growing number of businesses which have encountered problems with their banking arrangements. These seem to have worsened in the past couple of years and so we have been speaking to a number of businesses affected by this as well as to bankers, UK Export Finance and the ADS Group to better understand what is going on and why, what steps businesses can take to mitigate these problems and what long term strategy the industry should pursue to find a long-lasting solution.  In this bulletin we share our findings with you.

What is going on and why?

In a nutshell, businesses in the sector, particularly SMEs, are finding it increasingly difficult to source financing or open bank accounts. In some cases, their banks are withdrawing support altogether and asking them to move elsewhere at short notice. The pool of banks willing to engage with the sector is shrinking. It goes without saying that this presents an existential threat to many businesses.

It will come as no surprise that this is being driven by nervousness on the part of banks about reputational risk. If an adverse story breaks with one of their customers involved, questions will be asked about the bank’s involvement. At a time when banks are keen to burnish their credentials as good corporate citizens, the glare of this sort of bad publicity is something they can do without.

How can these problems be mitigated?

It is clear that there is no magic bullet and, unfortunately, some businesses with controversial products or customers may find that they are just not a ‘bankable’ proposition. However, here are some tips which may help to produce a fair hearing:

  • Be transparent. Banks in all sectors tend to be nervous of unusual or complex structures which seem designed to obscure ownership or avoid tax.
  • General presentation of the business is important, including in your publicity materials and on your website. Be clear about what your business does – it helps the relationship director at the bank to present your case to their credit committee. Defence products will be more attractive than those used for offence. Some products may be neutral, for example medical equipment. Don’t present them in a battlefield environment.
  • Who a business deals with will also be critical. Take care to emphasise the good credentials of your customers and supply chains. Do not assume that the fact that you have an export licence will get you home and dry. If you are bound by confidentiality clauses in your customer contracts, it is worth asking for an express permission to disclose details to specified bankers (or ensure these consents are built into the contracts at the outset). If you cannot tell your bank who you do business with, they won’t be able to support you.
  • It may well be worthwhile engaging a consultant who is experienced in presenting to banks, particularly in your sector, in order to improve your pitch.
  • Whether you are starting out or you are being rejected by your bank, do your research first before making any approaches and avoid saturating the market. Ask around to find out which banks might be amenable to talking to you and avoid approaches to junior members of staff – try to get a contact name higher up the food chain. In this respect, it could well be worth talking to UK Export Finance (if you are an exporter) or ADS first, both of whom are familiar with these problems and are well networked.

Long term strategy

ADS, having conducted a survey of their members earlier this year, have begun a dialogue with the government and UK Finance (formerly the British Bankers Association).  They believe that a long-term solution could include:

  • Banks to take a more bespoke risk-based approach to company profiles.
  • A state sponsored bank to take legally operating UK based companies who the private banks choose not to service.
  • The government to develop guarantee banking for UK issued export licensees.
  • UK government export licences and regular audits to be considered adequate proof of safeguards against diversion and a means to satisfy perceived risk.
  • UK based defence and security companies registered in the UK and operating under ECJU export controls to have accounts with the Bank of England and a facility that payments from offshore banks can be pre-checked for acceptance.

How you can help

Whilst ADS’s survey revealed a significant number of businesses encountering these problems, they believe that this is just the tip of the iceberg. They need to convince the government and UK Finance that this is a serious problem which is damaging to the sector.  The more ammunition (pardon the pun) that they have, the stronger the case they can make. If you have encountered problems in the past, or are currently experiencing them, they would welcome details from you; they have committed to treating these in strictest confidence. You can contact HCR here.