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 get back on its feet who plan to file for bankruptcy or following business bankruptcy. When a business files for bankruptcy, their funding sources are limited, and it is usually difficult for them to obtain the financing they need since current lenders may cut them off, or they could fall in default.
Under chapter 11 bankruptcy protection, a business can take advantage of Debtor in Possession Financing. This type of financing is available to companies that DIP lenders feel to have a credible plan to turn themselves around, not just wanting to liquidate the company. DIP financing usually has priority over existing debt, equity, and other claims from the creditor. Many small businesses are unaware of DIP loans.
How does DIP financing work?
Once a business enters chapter 11 bankruptcy and finds a lender willing to finance them, 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 will also need to obtain the existing lender’s consent to the new loan and prove that they will be protected under the Bankruptcy Code.
A distressed company about to file or has already submitted a bankruptcy filing can take advantage of DIP financing. They can obtain the working capital they need to restructure and continue operating the business.
Accounts receivable factoring in DIP financing
Accounts receivable factoring can also be used as a financing tool with DIP financing. During the bankruptcy process, accounts receivable financing can be a flexible way to obtain cash flow and get funding. With this, the distressed company receives the funding needing to operate not based on their credit, and the factor takes priority under the Bankruptcy Code.
How Porter Capital provides DIP Assistance