For Ukraine's mil-tech startups, access to credit remains a battlefield

When a bank asked Ukrainian defense tech company TAF Industries to pledge its assets as collateral for a simple bank loan, the company faced a dilemma: it couldn't reveal the location of its manufacturing facilities.

To prove the factory existed, TAF came up with a bold workaround — blindfolding bank officials and driving them to the site.

"It worked — they gave us a loan," Volodymyr Zinovskyi, CEO at TAF Industries, told the Kyiv Independent in a cafe in downtown Kyiv.

Well into the fifth year of Russia's full-scale invasion of Ukraine, Zinovskyi says that the demand from the front line cannot be fully covered by the resources that mil-tech companies possess, and that additional capital, such as bank finance, is key.

But Ukraine's private defense sector that emerged from scratch in the aftermath of Russia's invasion is still young and sometimes immature — unlike the country's well-established and more risk-averse banking sector.

With the extreme secrecy that mil-tech companies adhere to, plus the elevated threat that a Russian missile or drone will wipe out a company's assets, matching defense companies' financing needs to a bank's risk appetite can be tough.

But despite the difficulties, both sides are keen to make it work — and their efforts are already bearing fruit.

How defense financing in Ukraine has evolved

Philanthropy and government procurement were key for providing the initial capital for the sector in the first year of the full-scale invasion, but funding sources are diversifying.

Reinvesting big profits, investments from venture capital funds, bank loans, and even public listings now play a growing role.

"Bank financing is crucially important, especially for receiving credit for operations," says Serhii Goncharov, CEO of the National Association for Defense Industries, which represents more than 160 private companies in Ukraine's defense sector that collectively have an annual turnover of more than 4 billion euros ($4.6 billion).

"Companies need it to smooth production during gaps between big government procurement contracts, and also so that they can make bigger orders for components from abroad to benefit from lower prices," Goncharov says.

Yet despite Ukraine's mega-profitable and, in large part, state-owned banking sector, some say it feels underused.

"Demand for bank financing among defense companies is growing, but I wouldn't say it is already mass-scale or fully unlocked," Andrii Moyseenko, member of the management board at Ukreximbank, told the Kyiv Independent.

In 2024, the Ukrainian government launched a program subsidizing bank loans for mil-tech companies. Mil-tech companies can receive loans with 5% interest, and banks can charge a commercial interest rate, with the government covering the difference.

But, Moyseenko says, "even with preferential programs offering attractive conditions, we do not see a queue of clients."

Obstacles to financing

Secrecy and the ever-present risk that a company could be targeted by a Russian attack don't help the risk profile of Ukrainian mil-tech companies looking for some extra cash.

Banks also need to understand the legal cleanliness of the business and its operations, which is difficult to do when defense companies seek to stay secretive about supply chains or customers.

But while security looms large for mil-tech companies, it is not the only obstacle.

Private defense companies developed quickly and unusually, often stemming from volunteer initiatives, engineering teams, or small production facilities.

"Companies often grow very quickly and receive large orders, but do not always yet have a mature enough system of management, financial planning, production control, and reporting," Moyseenko says.

The sheer newness of the sector mean that companies cannot always tick the boxes that make a bank happy.

"Young businesses usually rent an office and only have their turnover, since they don't focus on buying buildings or big machines, which the banks want to see when extending a loan," says Goncharov, meaning banks have little tangible to fall back on should a loan go sour.

While the potential demand is very large, one issue is that defense companies don't necessarily have the reflex of going to the bank in the first place, according to Moyseenko.

"Banks want you to have diversified sources of revenue, but often for a military company, the only customer is Ukraine's procurement agency," Goncharov said.

But says, Moyseenko, banks "need to learn more actively how to work with the defense sector and stop treating it as too complex or too atypical for financing."

Looking toward the future

While challenges remain, the will to improve the situation is there.

"We see initiative and interest from the bank sector," says Goncharov, who points out that now over 20 banks in Ukraine, representing over 70% of the banking sector, are able to take advantage of the subsidized lending program.

"With a longer list of banks, many more companies can find one that will agree to the risk profile of the company," Zinovskyi of TAF says, agreeing that it's a positive signal.

Benjamin Krahmer, managing director at Verne Capital, a Venture Capital fund investing in European defense startups, says that the growth in Ukrainian companies just in the last year is "wild."

"We are seeing companies doing double-digit revenues at an insane growth level, which are profitable already," Krahmer told the Kyiv Independent.

With banks most suited to lend to companies for short-term operations, now appears a good time to lend more. And at the end of the day, all parties — banks, defense companies, and the government have an interest in making it work.

"Cheaper financing for Ukraine's mil-tech will mean cheaper products for the government — so they should try and facilitate cheaper lending," Goncharov said.