Aerospace and Defense (A&D) Capital Roadmap

Capital-intensive Aerospace & Defense (A&D) companies require a deliberate capital strategy. Front-loaded spend and the lumpy nature of contracts can create cash gaps and potential for dilution without a strategic financing plan. Start by planning around four structural realities:

• Capital intensity: Capex-intensive, hardware-forward defense companies require substantial upfront investment in non-recurring engineering (NRE), equipment, facilities and inventory often before generating material revenue.
• Long timelines: The path from prototype to product launch can take years of rigorous testing and validation, and the government procurement process (source selection, contracting, budgeting) can also take years.
• Nonlinear, milestone-driven revenue: Revenue often arrives in large, potentially unpredictable chunks tied to government awards or subcontractor relationships with 30- to 180-day payment cycles—creating valleys of death between awards, contract milestones, collections and capital outflows required to perform on a contract.
• Regulatory compliance load: Export controls (International Traffic in Arms Regulations (ITAR), Export Administration Regulations (EAR)), cybersecurity mandates (Cybersecurity Maturity Model Certification (CMMC)) and facility clearances are examples of regulatory requirements that can add potentially significant costs.

Founders should design an efficient capitalization plan on day one. The ongoing role of debt can be critical—capex-intensive defense tech companies often rely on debt throughout their entire life cycle, and understanding when and how to use different debt instruments is a key consideration when assessing ownership preservation, momentum and optionality.

While debt isn't the answer for every business, it is a highly useful tool specific to a defense tech company's needs and goals. Our goal is to shed light on scenarios where companies can manage leverage to improve capital efficiency and derisk their businesses.

This playbook equips you with a clear financing road map built for the realities of a hardware-focused startup's journey. Use it to navigate available options, build a resilient capital stack and plan proactively at every stage.

Chapter 1: Building the foundation

Early-stage funding for defense tech companies can come from a variety of sources including angel investors, government grants, SBIR/STTR awards and pre-seed venture capital. The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs are a common starting point, offering both capital and validation within the defense ecosystem.

While the two programs are very similar, the main difference is that STTR requires a formal collaboration with a nonprofit research institution. Because they share the same three-phase structure and serve a similar purpose in the capital journey, we'll primarily refer to SBIR for simplicity. You can learn more about their specific differences here.

While SBIR awards provide crucial early funding, success can create a new challenge: a funding gap between finalizing a prototype and starting production. A Phase II award proves the technology works, but scaling to production can require $5 to $20 million for NRE like tooling, test fixtures, supply chain qualification and manufacturing infrastructure. This is where most companies building physical products need their first institutional equity round—often before they have any production revenue.

Not every defense tech company follows the SBIR/STTR route, however. Other paths to early validation and capital formation include direct equity, engagements with the Defense Innovation Unit (DIU), subcontracting under defense primes, and bootstrapped or angel funding.

Why your funding type doesn't change the commercialization timeline

Regardless of which type of initial funding your firm receives, none of these routes automatically shortens the commercialization timeline. You still have to navigate manufacturing ramps, bridge gaps in working capital and engage in thoughtful capital stacking.

Some founders think bypassing SBIR means hypergrowth. But manufacturing is manufacturing and working capital cycles are working capital cycles. The fundamentals don't change.

Successful companies use early-stage grants and contract awards to achieve validation milestones to attract institutional capital and bank debt. This preparation is important because reaching commercialization requires you to navigate the valleys of death between funding stages. Whether those gaps come between rounds of funding or SBIR/STTR phases, you'll probably need additional sources of capital to get across them. To ensure those transitions go smoothly, companies must secure private capital before they need it. (See Chapter 4: Why timing is everything.)

Chapter 2: The transition to institutional equity

Many firms seek equity funding as they progress to commercialization. For defense tech companies, seed and Series A+ funding rounds serve multiple purposes—validating your business beyond government programs, providing capital to scale operations and bringing investors and their often-vast relationships into your network.

• Example early-stage capital requirements:
  • Seed round: $2 to $10 million (12 to 18 months runway)
  • Series A: $10 to $25 million (manufacturing readiness)

The equity trade-off

Equity financing provides obvious benefits but also comes with certain considerations. Defense tech founders need to understand and plan around the trade-offs involved as early as possible.

Equity benefits

• Future repayment is aligned with founders, an exit through M&A or an IPO.
• Access to investor, supply chain, government and customer networks.
• Support for projects that are risky to underwrite.

Equity considerations

• Dilution: Multiple large equity rounds can leave founders with minimal ownership. Capex-intensive companies are especially exposed.
• Exit constraints: Equity financing puts pressure on your exit—the more equity you raise, the higher the bar for exit valuation.

The strategic role of debt

Debt financing can be a strategic advantage, not just for founders but for all equity shareholders—and should be a critical consideration when building a long-term financing plan.

Debt benefits

• Reduced dilution, healthier cap tables and reasonable valuation expectations
• Bridge payment cycles and contract delays without raising equity under duress
• Signal of capital efficiency and planning discipline to future investors

When to use equity versus debt

Building a capital structure can be a complex task, but the core principle is to align the type of capital with its purpose. Equity provides maximum flexibility for dynamic, high-risk phases of company building. Debt is a more structured product that should be reserved for clear-cut use cases. Both create value and enable growth, but equity excels when you need adaptability, while debt works best for predictable, defined capital requirements.

Using equity for working capital can dilute your ownership for a temporary cash flow problem. Instead, preserve your equity for R&D and other activities that help you raise your next round at higher valuation.

Now that you understand considerations for using equity versus debt, let's explore the specific instruments available to hardware defense founders.

Chapter 3: A practical guide to debt products

Understanding what types of debt financing are available, and when to use them, is essential. Each debt product is designed for specific purposes and is most relevant at specific stages of company growth.

Understanding your debt options is crucial—but timing determines whether you can access it at all.
 

Chapter 4: Why timing is everything

In defense tech, the most common financing mistake isn't choosing the wrong debt product—it's waiting too long to pursue one. We routinely receive requests from companies that have less than 12 months of runway, have won a contract without the capital to fulfill it, have hit a payroll gap or were in the midst of government shutdown. Many of these requests are declined simply due to timing, based on runway.

Debt works best when

• It's secured alongside or soon after an institutional round.
• It complements, rather than replaces, equity.
• A robust financial reporting infrastructure is already in place.
• Contracts, receivables and milestones are well documented.

You engage lenders early, well before you need capital. Underwriting to funding often takes several weeks once diligence is complete.

Debt is difficult when

• It's sought in reaction to a shortfall, missed milestone or delayed award.
• The company has no established banking relationship or performance history to anchor underwriting.
• Equity is nearly gone, and runway is less than 12 months – this reduces debt options and the absence of an institutional equity cushion typically caps facility size.
• Financials are inconsistent or not prepared under GAAP, slowing diligence.

The risks of waiting: Scenarios we see daily

The takeaway: Engage early, document rigorously and align debt with equity. Successful capex-intensive defense tech companies treat debt as a strategic tool, whether for financing capex or weathering storms.

Once you've secured capital and it's timed and structured correctly, the focus shifts from winning awards to turning government contracts into cash without long delays. The companies that thrive in this phase don’t just manage growth—they build financial engines designed for the unique demands of production.

Chapter 5: Commercialization and scaling

Moving from early contracts to repeatable, full-scale production requires a more sophisticated financial strategy. The goal shifts from proving your technology to proving you can turn awarded work into predictable cash while preparing for your next major milestone—whether that's a larger funding round, profitability or an exit.

Diversify your capital mix

• Equity for innovation: Fund high-risk R&D, breakthrough technology and key hires that increase your long-term value.
• Debt for operations: Fund the work of running your business—finance equipment, manage payroll and bridge the cash gap while you wait for invoices, contract awards or equity investments.

Build your working capital engine

• Set up an AR-backed line of credit to unlock cash tied up in unpaid government invoices (often 60 to 180 days).
• Finance equipment with term loans or equipment finance matched to the asset’s useful life. To preserve equity for R&D, finance 80% to 100% of equipment over three to five years; match payments to your production ramp where possible.
• Simplify as you scale: As your revenue becomes more predictable, consolidate smaller, early-stage loans into a single, lower-cost senior facility to reduce the blended cost of capital.

Strengthen financial discipline

• Monthly close + rolling cash forecast: Maintain a 1- to 2-year forecast to guide strategic planning and fundraising.
• Compliance readiness: Get your financials reviewed or audited annually and ensure you have solid compliance practices
• Track scaling metrics: Monitor your contract backlog, inventory turns, gross margin per project, customer concentration and burn multiple (how efficiently you use cash to grow).
• Build the team and systems: Hire full-time or fractional roles essential to tracking financials, forecasting capital needs and developing financial statements such as a controller and CFO.

Anticipate common scaling challenges

• Subcontracting versus direct awards: Will you be subcontracting under a prime or contract directly with the government? The government pays quickly, prime contractors can range from 30- to 180+ day payment cycles. Your financing mechanisms should match your receivables cycle.
• Survive the Series B-C cash crunch: Many companies hit uneven cash flow at $10M to $30M in revenue and often need $20 million to more than $50 million to support inventory builds, facilities and product extensions. Secure flexible capital immediately after—or alongside—an equity round when you can negotiate from a place of strength, not during cash crunches.
• Plan for disruptions: Build a cash cushion and have a committed line of credit ready for unexpected events like government shutdowns, budget delays or supply chain issues.

Create alignment with investors, lenders and the business

Look for a lender with:

• Deep defense tech expertise who understands government contract cycles and security/compliance realities.
• The ability to scale facilities from single-digit millions to $25 million to $50 million or more as you grow, with a variety of financing options as you scale
• Network connections with defense investors, strategic partners to help you win, staff and scale.

The right lender becomes a strategic partner, not just a capital provider, helping you navigate the unique challenges of scaling hardware in the defense market.

Your roadmap to success

You now have the blueprint for a capital plan tailored to hardware-centric aerospace and defense tech startups. Start with non-dilutive validation like SBIR to prove your concept, layer in equity for operations and milestones while preserving ownership, and deploy debt strategically—venture debt, working capital, equipment finance, PO finance, AR factoring and more—to scale with minimal dilution and bridge the valleys of death and challenging working capital cycles.

Ready to build your capital stack or talk to our team? Email us at THCBDefenseTech@firstcitizens.com.