Debtor in Possession (DIP) Financing is a type of financing that helps businesses in distress find new funding sources to carry on operations as usual. DIP financing can help a company dealing with bankruptcy get back on its feet. It is usually difficult for these businesses to obtain traditional financing as lenders may cut them off.
Under chapter 11 bankruptcy protection, a business can take advantage of Debtor in Possession Financing. This type of financing is available to companies that lenders feel have a credible plan to turn themselves around. It is not for companies wanting to liquidate. DIP financing usually has priority over existing debt, equity, and other claims from the creditor. Many small businesses are unaware of the advantages of DIP loans.
How does DIP Financing work?
Once a business enters chapter 11 bankruptcy and finds a willing lender, the bankruptcy court must approve it. There must be a security interest in the collateral, a premium interest rate, and an approved budget for DIP financing. The loan is dependant on the bankruptcy court’s approval of the DIP loan being made in good faith. The distressed business needs to obtain the existing lender’s consent to the new loan and prove they will be protected under the Bankruptcy Code.
A distressed company about to file or who has already submitted a bankruptcy filing can take advantage of DIP financing. The company can obtain the working capital they need to restructure and continue operating the business.
Accounts Receivable Factoring in DIP Financing
DIP financing also uses accounts receivable factoring as a financing tool. During the bankruptcy process, accounts receivable factoring can be a flexible way to obtain cash flow and funding. The distressed company receives the funding to operate not based on its credit. The factor also takes priority under the Bankruptcy Code.
How Porter Capital provides DIP Assistance