How Small and Midsize Firms Can Benefit from Increased Military Spending

The United States and its European and Middle Eastern allies are in the midst of a dramatic increase in defense spending to meet geopolitical threats around the globe and expand their arsenals of high-technology weaponry.

To be sure, the ramp-up in spending benefits the large U.S. defense contractors such as Northrop Grumman, Lockheed Martin, Boeing and RTX Corporation. One example: The U.S. has negotiated an agreement with Saudi Arabia that includes a nearly $142 billion arms package featuring advanced warfighting systems from a dozen American defense firms.

What may be less obvious, however, are the many opportunities increased global defense spending and modernization efforts present for small and midsize U.S. businesses, especially those with specialized capabilities in advanced technologies and manufacturing, says Larry Schmill, a senior vice president for aerospace, defense and transportation within Fifth Third’s Corporate & Investment Banking and a 20-year U.S. Marine Corps veteran.

“There are increased opportunities for nontraditional companies to be defense subcontractors,” Schmill says. “Because of the demand for agile and rapid production, there is a shift away from long procurement cycles toward faster, more responsive production models with emphasis on 3D printing, automation and modular manufacturing.”

Midsize civilian firms with tech know-how in such fields as satellites and drones are in increasing demand to bid on Pentagon contracts as well as participate in existing deals with the large defense contractors. The surge in new business is also creating merger and acquisition opportunities as existing contractors seek to increase scale and private equity sponsors take advantage of the changing political climate to build sector champions.

The war in Ukraine, conflicts in the Middle East and an arms buildup in Asia are the main drivers of the military’s current modernization efforts, Schmill explains. The current budget bill calls for defense spending of more than $831 billion, the largest Department of Defense budget in history.

Other events are also fueling increased spending. In late June 2025, NATO allies agreed to more than double their defense spending target from 2% of gross domestic product (GDP) to a level up to 5% by 2035. Increased military spending in China has prompted the U.S. and allies to strengthen their military presence in that area. Taiwan, which is claimed by China, has announced plans to increase defense spending to 3% of GDP through a special budget.

Schmill points out three dominant trends in the aerospace and defense industry that play to the strengths of flexible and fast-moving small and midsize companies.

• The push toward nontraditional defense subcontractors. The Department of Defense is actively encouraging the participation of nontraditional defense contractors, which opens the door to small and midsize businesses. A 2025 executive order and DOD memo mandate the increased use of commercial solutions, which often translates into small and midsize businesses that don’t traditionally work in defense. Companies that specialize in unmanned aerospace systems, space and satellite technology, cybersecurity, artificial intelligence, robotics and autonomous vehicles are all in demand.
• Shorter procurement cycles. The DOD is moving away from its traditional long procurement cycles toward faster, more responsive production models. Think 3D printing and automated and modular manufacturing. These advanced manufacturing techniques that small and midsize businesses are already using can help meet the DOD’s urgent need for rapid production cycles.
• A new focus on supply chains. The pandemic exposed many vulnerabilities in the global supply chain system, including defense suppliers. Small and medium-sized businesses with domestic capabilities can benefit from DOD’s push to onshore critical components for all types of defense systems.

Small and midsize companies that work directly with big U.S. defense contractors and their subcontractors are directly benefiting from these trends and the rapid rise in defense spending. “We can see a concurrent rise in subcontracts with small and midsize businesses as major firms like Lockheed, Boeing and Northrop expand,” says Schmill.

Although the primary defense companies have the capabilities needed right now, they are reaching out more than ever to contract with small and midsize companies, Schmill says.

Businesses that pivot

In addition, Schmill notes that civilian-based small and midsize businesses with the necessary technological and manufacturing capabilities may find they can successfully pivot to a more military posture and contract directly with the DOD, perhaps turning into a new, large defense contractor themselves.

Take Anduril Industries. Founded in 2017, the makers of a virtual reality headset teamed up with defense department initiatives in Silicon Valley to leverage their expertise in AI-powered surveillance and autonomous systems software. They now produce ghost drones for military surveillance and reconnaissance. What started as a small virtual reality company is now valued in the billions.

Defense contracting hurdles still exist

Stories like Anduril don’t negate the fact that there are plenty of barriers to breaking into defense, even for the most agile and technically savvy small and midsize companies. Plenty of authorizations and regulations still exist.

Chief among them, according to Schmill, are the zero-trust architecture procedures mandated by the DOD, which require companies to implement strict security measures to safeguard sensitive information related to national security. As the name implies, zero trust relates to cybersecurity and its framework within the DOD that fundamentally shifts how access to data and systems is granted and managed. “Instead of assuming that users or devices inside a network are trustworthy, zero trust assumes no implicit trust — every access request must be explicitly verified,” Schmill explains.

To make the procurement and approval process smoother, small and midsize companies that likely don’t have the resources and know-how to navigate the Pentagon have a great resource: former members of the military.

“A lot of former military members have gone to the prime defense contractors,” says Schmill. “Now we’re seeing a shift toward these members going to small and medium-sized businesses so they can really help innovate.”

Hiring former military officers can give companies a bird’s eye view of the specific gaps in their current capabilities as well as provide critical contacts at the Pentagon and in-depth knowledge of how best to deal with the DOD’s procurement requirements.

The impact of NATO’s defense spending increase

Increased military spending by NATO allies may also be an opportunity for small and midsize companies. If adopted, spending increases would be a dramatic expansion that could create demand for new business facilities, new skilled labor and new innovations. Although European governments are increasing domestic defense production, they still rely on U.S. suppliers for many of the high-tech components that go into weapons systems.

Small and midsize defense business support

M&A activity and private equity investing have exploded in the defense tech and manufacturing sector recently. Companies that are looking to expand through these deals need to get their financial reporting in order. An M&A specialist at a financial institution like Fifth Third Bank can help firms clean up their financials and boost operating performance.

For those companies that want to grow organically, a strong financial partner with a background in defense can provide the support needed to manage working capital daily, especially during times of expansion.

Once defense contracts are approved, the need for expansion proceeds quickly. Your firm will need the working capital and lines of credit to hire staff, purchase equipment and expand facilities. A government defense contract can serve as collateral for a line of credit.

“One day you have no DOD contracts, and the next day you have $100 million worth. That’s how it works. So you have to be prepared,” Schmill says. “The last thing you want is to be in a position where you win a contract, but then you don’t have the capacity or support to provide your expertise.”

With the recent defense spending buildup, well-prepared small and midsize businesses with specialized technical expertise and manufacturing capabilities are in demand right now and may be well positioned to explore opportunities in the current expansion, both in the U.S. and abroad.

To learn more about how your company can best position itself to take advantage of the boom in defense spending, visit here.