Debtor-in-Possession (DIP) Financing Can Help Turn a Company Around Following Bankruptcy

Businesses in financial distress typically find that their sources of new funding shrink just when they need financing the most. Their ability to obtain further advances from current lenders may be cut off. They may also fall into default. This is where Debtor-in-Possession (DIP) comes in handy.

DIP Financing Solutions

Help Turn a Company Around Following Bankruptcy

For many distressed companies, however, there is hope for new financing. If they file for Chapter 11 bankruptcy protection, they may be able to take advantage of debtor-in-possession financing (DIP Financing). A DIP Financing will help companies reverse course, give them restructuring support, and return to profitability.

What is the Meaning of Debtor-in-Possession Financing (DIP Financing)?

Debtor-in-possession or DIP financing is funding provided to businesses that has filed for Chapter 11 bankruptcy protection from creditors. It’s typically available to companies where lenders believe the company has a credible chance and a viable plan to turn itself around. It is not available to firms that simply want to liquidate the company. A post-petition lien is created after filing.

The term “Debtor-in-Possession” refers to the fact that the current management and board of directors remain “in possession” of the business following its Chapter 11 bankruptcy filing. Many small business owners are not aware that they can obtain financing to turn their company around after declaring for bankruptcy.

Many lenders see Debtor in Possession financing as an attractive lending opportunity because of the special treatment that business bankruptcy loans receive under U.S. bankruptcy law. Under the law, DIP creditors must receive the payment before other creditors. Many lenders will commit to a DIP Chapter 11 loan while they would not make a loan commitment to the same business in the absence of a bankruptcy filing.

Best Factoring Company Get the Cash you need Today

DIP Financing Can Help fund a Company's Exit from Bankruptcy

Apply Now

What is the Process in Debtor-in-Possession (DIP) Financing?

In DIP restructuring finance, the assets pledged as collateral must be sufficient to cover the business bankruptcy loan. Here’s how the DIP Chapter 11 loan process works:

When the company locates a lender that is willing to finance its turnaround, the company seeks court approval from the Bankruptcy Court. Standard DIP financing terms include a “priority” security interest in the collateral, a market-rate or even premium rate of interest, an approved budget, and other related lender protections. Creditors may object to the loan if they feel they will be made worse off. The Bankruptcy Court will be the one to decide whether to approve the loan or not.

If a company in Chapter 11 bankruptcy has existing secured loans and wants to borrow on a secured basis that is equal or senior to the existing loans,

  1. It will need to obtain the current lender(s) consent to the new loan
  2. It will have to convince the Bankruptcy Court that the existing lender(s) will be adequately protected. That is that they will not be made worse off by the new loan.
explaining the Debtor in Possession process

The DIP Financing Process

A current lender who provided financing to the firm before its bankruptcy filing may be willing to commit to a DIP business bankruptcy loan, even if it has declined to make further advances before the bankruptcy proceeding. In addition to the added protection under the Bankruptcy Code, the lender may also have its own goals in creating the DIP loan. For example, to help improve the company so that it can ultimately be sold to another party.

If the Bankruptcy Court approves a DIP loan and finds that it was made in good faith, the credit will not be subject to legal challenge. That differs from the same loan made outside of bankruptcy, which might have been subject to challenge.

The bottom line is that while there may be some issues, in the appropriate circumstances, a distressed company may be able to take advantage of the DIP financing procedures under Chapter 11 of the Bankruptcy Code. In doing so, it can obtain the liquidity it needs to finance a turnaround or restructuring. It can also finance the process of selling the company, even if it could not obtain such a loan outside of bankruptcy.

How is the Accounts Receivable Factoring used in DIP financing?

Companies can also use factoring as a financing tool in DIP financing. Factoring is a possibility that many small business owners do not realize. Accounts receivable financing can be one of the most flexible ways to obtain funding and recapitalization during the Chapter 11 bankruptcy process. Factoring can be a win-win for both the borrowing company and the factoring firm. The borrower receives needed funding that is not based on its credit status, and the factoring firm achieves priority status under the Bankruptcy Code.

What is the Difference Between Exit Financing and DIP financing?

Debtor in Possession (DIP) financing is part of a company’s Chapter 11 bankruptcy working capital strategy. The funding is available while the company is going through a reorganization, hoping to eventually come out of bankruptcy with a stronger balance sheet and a plan to move forward. Exit financing is the company’s post-bankruptcy funding package. In smaller deals, lenders often negotiate and commit to a debtor-in-possession and an exit facility at the same time. This is known as a “DIP rollover.”

Learn More about DIP Financing

  1. [PDF] Debtor-in-Possession Financing primer from International Law Firm Davis Polk & Wardwell
  2. DIP Finance Case Study from abfJournal.com
  3. DIP Financing from cooley.com
  4. Debtor-in-Possession financing term sheet example

The Bottom Line

If your company is experiencing financial distress, it is important to consult an experienced bankruptcy attorney and restructuring or turnaround specialist to determine all of your viable options. You may be able to do a workout or other restructuring process outside of bankruptcy. However, if you determine that Chapter 11 bankruptcy is your best option, DIP financing may provide a strong opportunity to help turn your company around. With Paragon as your DIP Lender, we can offer our years of expertise in DIP. Also, for exit financing, and other creative debt solutions.

Time is of the essence. Contact us today to discuss your DIP Financing options.

Apply securely now, email us, chat live or call (888) 400-5931 ext 1.

Money When Your Business Needs It Most!™

  • Get Cash Today

    Best Factoring CompanyGet the Cash You Need Today

    Just fill out this quick & easy form!

  • This field is for validation purposes and should be left unchanged.
Get Cash Today
  • Quick Contact Form
  • This field is for validation purposes and should be left unchanged.

Back to Top

Best Factoring Company

Get Started Immediately