Europe's defence and aerospace order books have never been fuller, and money has become dearer again. The companies that turn orders into cash soonest will have the most room to keep investing, and the terms that decide this are being written into contracts now.
Andy Demir · 18 October 2026 · 12 min read
Executive Summary
Two German defence groups reported on their cash in 2026 and told opposite stories for the same reason. Hensoldt raised its 2026 free-cash-flow guidance on 1 June because customers were paying more in advance. Rheinmetall reported first-half operating free cash flow of minus €1.6 billion, citing a shift in the timing of advance payments alongside inventory and capacity investment. Both companies are growing fast; the difference lies in when the money arrives. With the ECB raising its deposit rate to 2.50% in September and the Bank of England split 6–3 on holding at 3.75%, funding that gap costs more than it did a year ago. My argument is that time-to-cash is becoming an industrial capability: a supplier that negotiates payment timing well can fund more capacity from the same balance sheet. EU money is flowing through SAFE and new EIB guarantees, but how much of its timing benefit reaches tier-two and tier-three suppliers depends on contract terms. I expect cash conversion and advance payments to sit beside backlog in European defence results commentary by mid-2027. The option I would put to a supplier's board is to review the cash profile of every major bid before its payment terms are fixed.
In This Essay
- Two Defence Groups, One Lesson About Timing
- What a Contract Costs Before It Pays
- Why a Record Backlog Can Still Consume Cash
- Where Europe's Cheapest Money Stops
- Contract Design as a Source of Capacity
- Cash Conversion Moves Into the Results Commentary
- Pricing Time Before the Terms Are Fixed
- Questions for the C-Suite and the Board
- References
Two Defence Groups, One Lesson About Timing
Two of Germany's best-known defence companies reported on their cash this year, and the stories ran in opposite directions for the same reason. On 1 June, Hensoldt raised its 2026 guidance for adjusted free cash flow from around 40% to around 50% of adjusted EBITDA, attributing the increase mainly to higher customer advance payments, supported by faster procurement in Germany (HENSOLDT, 2026). Ten weeks later, Rheinmetall reported record first-half sales of €5.2 billion, up 39%, alongside operating free cash flow of minus €1.6 billion, against minus €631 million a year earlier. The company named a shift in the timing of advance payments, inventory built for later quarters, higher receivables and continued capacity investment as the causes (Rheinmetall, 2026). One figure is guidance and the other is a reported result, so they are not a like-for-like comparison. What both companies point to is the same variable: when the customer's money arrives relative to the money the company has already spent.
That variable has become more expensive to get wrong. On 10 September, the European Central Bank raised its three key rates by 25 basis points, taking the deposit facility rate to 2.50% from 16 September, as the energy shock from the conflict in the Middle East kept inflation above target (European Central Bank, 2026a). A week later, the US Federal Reserve moved its target range up to 3.75–4.00% (Board of Governors of the Federal Reserve System, n.d.), and the Bank of England held Bank Rate at 3.75% on a 6–3 vote, with three members preferring a rise (Bank of England, 2026). The ECB's composite cost of borrowing for new corporate loans stood at 3.77% in August, broadly unchanged on the month, and that average conceals wide differences by size, maturity and credit quality (European Central Bank, 2026b).
My argument is that time-to-cash is becoming an industrial capability in its own right. Two suppliers with the same order book, the same engineering and the same nominal margin can earn different returns, and grow at different speeds, because one of them has to fund its programmes for longer before the customer pays. In a period of record demand, the company that converts orders into cash sooner can fund the next production line, the next hire and the next bid from the same balance sheet. The other has to borrow for it, or wait.
What a Contract Costs Before It Pays
An aerospace or defence programme does not turn an order into cash on signature. Before a structural assembly, an avionics unit or an ammunition lot reaches the customer, the supplier may have paid for months of engineering, long-lead materials, tooling, qualification and inventory. Some contracts carry substantial advances. Others pay on milestones tied to design reviews, first-article inspection, delivery or acceptance. Products of the same value can therefore carry very different financing needs.
A simple illustration makes the point. Take two programmes, each worth €20 million in sales and €3 million in operating profit before financing. In the first, customer milestones broadly match the supplier's spending, and the average net funding requirement over the year is €4 million. In the second, payment comes later, and the average requirement is €10 million. At an illustrative all-in financing cost of 6%, which is above the euro-area average and closer to what a smaller supplier with guarantees and fees might pay, the first programme costs €240,000 a year to carry and the second €600,000. The €360,000 difference represents 12% of the programme's operating profit, with no change to price, content, or headline margin. At the ECB's August composite rate of 3.77%, the gap would still be about €226,000. These figures are illustrative and deliberately simple; real costs depend on the exact timing of cash flows, guarantees, tax and the company's funding mix.
A contract's economic quality depends on the profit it promises and on the capital it holds before that profit arrives, and the second part matters most when several ramps overlap. A supplier that can carry each contract on its own may find that three at once exceed its facilities. The constraint then shows up in places that look operational: which programme gets the next machine, which purchase order is delayed, which bid the company decides not to make.
Why a Record Backlog Can Still Consume Cash
The industry has never had more work. PwC's annual review of the 100 largest aerospace and defence companies found that their combined revenue passed $1 trillion in 2025, that the commercial aircraft backlog had reached nearly 15,000 units, and that defence backlogs had grown by more than half in three years, with supply chains, production and workforce named as the binding constraints (PwC, 2026). Rheinmetall's own backlog stood at €80.5 billion at the end of June, up from €56.0 billion a year earlier (Rheinmetall, 2026).
Backlog is a measure of future revenue, and a growing one usually means more cash out before more cash in. Higher planned output justifies new equipment. Longer lead times push material commitments earlier. Qualification work, and in civil aerospace the work that supports certification, consumes engineering hours before the first delivery. None of this is a sign of poor management. A J.P. Morgan treasury paper from February, written by a bank that sells inventory and receivables finance, makes the same point: in the current defence cycle inventory is rising by design, and the pressure falls hardest on tier-one and tier-two suppliers that build stock and add capacity before they are paid (J.P. Morgan, 2026).
The useful distinction for a board is between commercial growth, the value of business won and delivered, and capital-efficient growth, the cash and investment required to deliver it. A contract with a lower margin can earn a better return on capital if it ties up much less money during production. A programme with a long cash cycle can still be the right choice when it brings technology, a reference customer or access to a market. The opportunity is to weigh these together before the terms are fixed, rather than treating financing as a calculation that follows the commercial decision.
Where Europe's Cheapest Money Stops
Europe is putting more public money into this industry than at any time in a generation, and much of it arrives as long-dated, low-cost capital. On 29 June, the European Investment Bank signed a first €1 billion loan to Airbus under a €3 billion envelope, the largest corporate loan the EIB has authorised, to fund research and development in France, Germany and Spain through 2030. Airbus's chief financial officer, Thomas Toepfer, said the terms would help the company manage its balance sheet and "minimise the cost of carry" (European Investment Bank, 2026a). The phrase is a useful reminder that even the strongest balance sheets in the sector price the time between spending and return.
The question for the wider industry is how far down the chain that kind of capital reaches. The EU's Security Action for Europe instrument lends up to €150 billion to member states, not to companies; Estonia, for example, received a first payment of €351.6 million on 12 August, 15% of its €2.3 billion allocation (European Commission, n.d.-b). Some of that money is already visible in industrial order books: Rheinmetall reports Romanian orders for Lynx infantry fighting vehicles and four naval vessels financed through SAFE (Rheinmetall, 2026). The Commission's readiness roadmap aims for at least 40% of defence procurement to be organised jointly by the end of 2027 and for SAFE to be at least half disbursed by the third quarter of 2028 (European Commission, n.d.-a).
A state that borrows cheaply and pays its prime an advance has solved the prime's timing problem. Whether that solves the problem for the prime's suppliers depends on whether advance terms flow down the contract chain, and that is a matter of contract design, not policy. The EIB appears to recognise the gap. On 8 October it signed a guarantee with Santander to mobilise about €300 million of new lending for security and defence SMEs and mid-caps, explicitly including working capital for new contracts, as part of a €3 billion pan-European intermediated instrument (European Investment Bank, 2026b). The ECB's account of its September meeting adds a further signal: members noted that firms were borrowing partly to cover working capital after the energy shock, and that credit to smaller companies could be constrained because, unlike larger firms, they rarely have access to private credit (European Central Bank, 2026c). My reading is that the second-order effect of Europe's defence financing will be decided less by the size of the envelopes than by how much of their timing benefit reaches the third tier. That is the question of who funds the suppliers everyone depends on, a question that runs through SwissTechnic's Finance & Capital coverage.
Contract Design as a Source of Capacity
The tools are familiar. Customer advances can fund early materials and engineering. Milestone payments can tie receipts to visible progress. Leasing can spread the cost of new equipment. Inventory and receivables finance can turn eligible assets into liquidity, and bank guarantees can secure an advance the customer would otherwise withhold. The skill lies in matching the instrument to the programme. A long development contract values maturity and certainty. A recurring production part values predictable payment and inventory finance. A defence electronics business entering volume production is usually dominated by qualification costs and component commitments made before the first invoice.
This turns a contract negotiation into a capital-allocation decision, and in most companies the information needed for that decision sits in three places. Sales knows the price, the payment terms and the competitive position. Operations and procurement know when money will be spent on materials, labour and equipment. Finance knows the facilities, their cost and the headroom. Each function works to its own clock and its own targets, which is normal in a complex organisation. The opportunity is to bring the expected cash profile of a bid into the room before the commercial terms are agreed, so that two structures can be compared on peak funding, payment predictability and return on capital as well as on revenue and margin.
Some improvements in working capital only move the cost to someone else. Extending payment terms to a small subcontractor reduces the buyer's funding needs and increases the subcontractor's, and if that subcontractor then struggles to buy materials, the delivery delay can cost more than the financing saved. The stronger option is to improve the economics of the relationship as a whole. A prime with reliable receipts and good access to credit can often support a critical supplier through faster payments, supply-chain finance, or by passing on part of an advance, at little cost to itself.
The strongest objection deserves a fair hearing. Large primes already run sophisticated treasury functions and negotiate advances as a matter of course, and Hensoldt's guidance shows that customers in Germany are paying earlier. Many defence programmes will go ahead whatever the financing cost, and rates may fall again: the ECB says it is not committing to any path, and the Bank of England vote shows a committee divided in both directions. If rates fall, the value of shortening the cash cycle falls with them. All of this is true, and it narrows the argument without removing it. Timing gaps still have to be funded by someone, the someone is increasingly the smaller supplier with the least access to cheap credit, and capital released from a shorter cycle can be reinvested whatever the rate.
Cash Conversion Moves Into the Results Commentary
I expect cash conversion and the timing of customer advances to become a standard part of how European defence and aerospace groups explain their results and guidance, alongside backlog and margin, through the full-year 2026 reporting season in February and March 2027 and the half-year results that follow in the summer. Hensoldt has already framed a guidance change in these terms, and Rheinmetall has explained a first-half cash outflow the same way. My confidence is moderate to fairly high, because the drivers are in place: rates are higher than a year ago, SAFE-financed contracts are being signed, and the EIB is building a channel specifically for supplier working capital.
Three signals would confirm it: more companies quantifying advance payments or cash conversion in guidance; further banks signing guarantees under the EIB's €3 billion defence supply-chain instrument; and SAFE-financed contracts that publicly include prefinancing passed down to subcontractors. I would be wrong if, by mid-2027, results commentary from the larger European groups returns to backlog and margin alone, or if a fall in rates leaves investment and contracting practice unchanged. The companies that gain are those with strong customer terms and room to support their suppliers; the ones that lose are suppliers carrying several ramps on short-term bank lines. Beyond 2027 I see this as a scenario rather than a forecast: by 2030, capital productivity may sit beside engineering and production performance as a recognised source of competitive strength, though it will never substitute for either.
Pricing Time Before the Terms Are Fixed
The board I have in mind is that of a European tier-one or tier-two supplier, in aerospace or defence, bidding for work in the current ramp. Were I part of that discussion, the option I would put on the table is this: no major bid or capacity investment goes to the board without its expected cash profile, showing peak funding, the months to cash break-even, and the cost of carrying it, set beside revenue and margin. That replaces nothing the company already does. It adds one page to the bid review and changes the order of the conversation, because the cash profile is discussed before the payment terms are agreed rather than after.
In the first 90 days, the chief financial officer and the commercial director could take three live or recent bids that differ in size, length and payment structure, model their cash profiles, and test realistic alternatives: different milestones, an advance secured by a bank guarantee, staged material commitments, a supplier-finance line. In six months, the profile could become a standard part of bid approval, with the programme manager owning the forecast and finance owning the funding plan. By twelve months, the company would have a measure it can track: average funded balance per euro of revenue, by programme. Using the illustration above, moving the average funded balance on a €20 million programme by €6 million is worth roughly €225,000 to €360,000 a year at financing costs between 3.77% and 6%, or about 1.1 to 1.8 points of margin on that programme. Across a portfolio, the larger gain is headroom: more capacity funded from the same facilities, and suppliers that stay solvent through the ramp.
The case for doing it now is that payment terms are set at signature and remain in effect for the life of the programme. Contracts signed over the next twelve to eighteen months, including those financed through SAFE before the end-2027 joint-procurement milestone, will set cash profiles that run to 2030 and beyond, and a term not requested now will be hard to add later. The trade-off is real: pressing for earlier payment can cost price or goodwill, and some customers' rules leave little room. I would advise differently for a company with ample committed funding at low cost, or for one where the customer clearly values a lower price over better terms, and I would revisit the argument if the ECB and the Bank of England begin cutting again. For most suppliers in this cycle, though, demand is not the limiting factor. The limit is how much growth their balance sheets can carry before the customer pays, and that limit is partly written into the contracts they are about to sign.
Questions for the C-Suite and the Board
Which three bids or capacity investments over the next 12 months require the most funding before the customer pays? Answered by the CFO and the commercial director together, this shows where better payment terms would release the most capacity.
What advance or milestone structure could we realistically ask for on each, and what would we offer in return? The answer puts a price on time in each customer relationship and shows where a bank guarantee could make an advance acceptable to the customer.
How much of the advances we receive do we pass on to critical suppliers, and where would doing more protect delivery? For the COO and the head of procurement, this distinguishes working-capital gains that strengthen the supply chain from those that merely shift costs.
Which SAFE-financed or EIB-supported opportunities could we reach in the next eighteen months, directly or through a prime? The CEO and business-development lead assess whether the company is positioned to benefit from Europe's cheapest money.
What is our average funded balance per euro of revenue, by programme, and who owns that number? Programme managers who own the forecast make the cash profile part of delivery, not an afterthought for finance.
If the ECB and the Bank of England cut rates in 2027, which of these improvements would still be worth making? This separates structural gains in capacity and supplier resilience from savings that depend on the rate cycle.
References
Bank of England. (2026, September 17). Bank Rate maintained at 3.75%: September 2026 Monetary Policy Summary and minutes. https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2026/september-2026
Board of Governors of the Federal Reserve System. (n.d.). Open market operations. Retrieved October 15, 2026, from https://www.federalreserve.gov/monetarypolicy/openmarket.htm
European Central Bank. (2026a, September 10). Monetary policy decisions [Press release]. https://www.ecb.europa.eu/press/pr/date/2026/html/ecb.mp260910~314e508016.en.html
European Central Bank. (2026b, October 1). Euro area bank interest rate statistics: August 2026 [Press release]. https://www.ecb.europa.eu/press/stats/mfi/html/ecb.mir2610~8e4898ad10.en.html
European Central Bank. (2026c, October 8). Account of the monetary policy meeting of the Governing Council of the European Central Bank held in Berlin on 9–10 September 2026. https://www.ecb.europa.eu/press/accounts/2026/html/ecb.mg261008~a10153d090.en.html
European Commission, Directorate-General for Defence Industry and Space. (n.d.-a). Readiness Roadmap 2030. Retrieved October 15, 2026, from https://defence-industry-space.ec.europa.eu/eu-defence-industry/readiness-roadmap-2030_en
European Commission, Directorate-General for Defence Industry and Space. (n.d.-b). SAFE: Security Action for Europe. Retrieved October 15, 2026, from https://defence-industry-space.ec.europa.eu/eu-defence-industry/safe-security-action-europe_en
European Investment Bank. (2026a, June 29). EIB commits €3 billion to Airbus to boost Europe's industrial base and technological edge in aerospace innovation [Press release]. https://www.eib.org/en/press/all/2026-228-eib-commits-eur3-billion-to-airbus-to-boost-europe-s-industrial-base-and-technological-edge-in-aerospace-innovation
European Investment Bank. (2026b, October 8). The EIB and Santander will mobilise €300 million to support SMEs and mid-caps in the security and defence sector [Press release]. https://www.eib.org/en/press/all/2026-327-the-eib-and-santander-will-mobilise-eur300-million-to-support-smes-and-mid-caps-in-the-security-and-defence-sector
HENSOLDT. (2026, June 1). HENSOLDT raises adjusted free cash flow guidance for 2026 and confirms net leverage target [Press release]. https://www.hensoldt.net/news/hensoldt-raises-adjusted-free-cash-flow-guidance-for-2026-and-confirms-net-leverage-target
J.P. Morgan. (2026, February 9). Financing resilience: Unlocking strategic capital in the defence industrial base. https://www.jpmorgan.com/insights/treasury/trade-working-capital/defense-supply-chain-inventory-finance
PwC. (2026, June 9). PwC's global aerospace and defence: Annual industry performance and outlook (2026 ed.). https://www.pwc.com/us/en/industries/industrial-products/library/aerospace-defense-review-and-forecast.html
Rheinmetall. (2026, August 6). Rheinmetall's H1: Strong sales growth and record profitability [Press release]. https://www.rheinmetall.com/en/media/news-watch/news/2026/08/2026-08-06-rheinmetall-news-half-yearly-financial-report-h1
Not investment advice. For information only. Sources accessed 15 October 2026.
About Andy Demir
Andy Demir is the editor of SwissTechnic and writes on strategy, international growth and capital in aerospace, defence, space and advanced technology. Drawing on a career in commercial leadership, the analysis examines how technology, sovereignty and industrial capability shape competitive power and long-term value.
