Trade finance for critical materials in defence and energy – a UK perspective

The need to protect supply of critical raw materials for national security sectors

Growing geopolitical uncertainty is prompting governments to invest more heavily in national security priorities, including defence and energy independence.

At the same time, the global trading environment has become more fragmented. As the former Chief of the UK's Secret Intelligence Service recently observed, supply chains are increasingly becoming 'weaponised' and trading relationships politicised.¹

These pressures are acute in the markets for critical minerals and strategically important materials. Supply is highly concentrated, while demand is rising sharply. In the UK, for example, government projections suggest copper demand will almost double by 2035 and lithium demand will increase by over 1,000%.⁵

This creates vulnerabilities. Concentrated supply chains can become points of leverage for adversaries.² Businesses in the defence and energy sectors therefore face a dual challenge: meeting increased government demand while protecting against supply chain disruption.

In this environment, reliance on “just in time” practices (identified as a vulnerability in the UK’s 2025 Strategic Defence Review) may no longer be viable. Companies may need to carry higher levels of raw material inventory. In munitions, for instance, the UK’s Defence Industrial Strategy calls for a shift from “just in time” to “always on” production.

This has significant working capital implications. Trade finance techniques can help manage the increased cost of holding inventory and the extended cash‑conversion cycle. In this briefing we focus on:

• inventory financing, which addresses the cost of holding stock before it enters production; and
• receivables financing, which helps bridge the gap between delivery and payment.

Traditional difficulties for trade finance in this space

Trade financing techniques have historically been difficult to apply in the defence and national security sectors and, increasingly, in critical energy supply chains.

Inventory financing challenges

Inventory financing relies on a lender being able to take security over, or title to, the good being financed. In the defence and energy context, however, this is often constrained by:

1. Regulatory and export controls: Materials may be subject to regulation or export controls in their country of origin. This can make the taking of security or title, and enforcement, difficult or impossible. Costs and administrative burdens are higher, particularly for dual-use goods and regulated critical raw materials.
2. Storage and logistics restrictions: Certain materials must be stored at secure or regulated production facilities, rather than with third-party commodities managers commonly used in conventional inventory financing structures.
3. Title transfer: In certain defence procurement arrangements, title to raw materials and components passes to the government purchaser on arrival with the manufacturer, before production begins. Where that is the case, conventional inventory financing becomes difficult to structure.

Receivables financing challenges

Receivables financing depends on the ability to transfer a receivable to a lender. In defence and critical energy, this is complicated by:

1. Restrictions on assignment: Underlying contracts may prohibit or limit assignment.
2. Payment cycles: Even where assignment is permitted, government receivables may have long payment cycles and milestone-based payment triggers.

What's changing, and how we can help

Globally, policymakers are alive to these challenges and are developing solutions to make the financing of defence and critical energy supplies more "bankable".

For example, in the UK:

1. UK Export Finance recently launched a new 'Critical Goods Export Development Guarantee' aimed at UK-based business supplying critical mineral products to UK exporters;
2. The UK National Wealth Fund has supply chain resilience as a strategic priority to "better support the UK's defence and security", with commitments across critical minerals, dual-use technology and the defence and energy sectors; and
3. The government is due to publish its Defence Finance and Investment Strategy, aligned with the UK’s Defence Industrial Strategy 2025, which is expected to include recommendations for supporting private finance in the defence sector.

Elsewhere, the European Union's SAFE (Security Action for Europe) programme is expected to provide up to €150m in competitively-priced loans to EU member states for defence investment, with the goal of mobilising private capital. In the United States, federal spending on critical mineral stockpiling for its defence industry is increasing.

Our team advises on innovative structured inventory and trade finance products, including those supported by sovereign guarantees (often essential for critical minerals financing or defence financing). We help clients engage with governments and policy makers to navigate export controls and regulatory regimes and structure bespoke financing solutions. In a rapidly changing world, we are well placed to assist clients with their supply chain resilience in an essential and highly regulated sector.

Authored by Oliver Travers, Andrew Taylor, David Leggott, and Malcolm Parry.