If your company is in financial distress and is already on the brink of bankruptcy, you need to look into your options for keeping your company afloat and paying off your creditors. There is a solution to this kind of situation called debtor-in-possession (DIP) lending. This is a unique kind of financing that will allow your company to fund your operations while you are in the process of filing a Chapter 11 bankruptcy claim. This guide discusses how DIP lending works and why you should consider getting one in the event you are put in a difficult financial situation.
What is DIP Financing?
DIP financing is a specialized form of financing that allows you to fund immediate working capital needs and maintain adequate liquidity for companies that are already in the process of Chapter 11 bankruptcy. This is crucial since being in such a situation can be quite challenging for many companies. Since your company’s assets are typically pledged to secure your indebtedness in such a situation, you’ll find it really hard to attract new capital to continue your operations or to refinance your existing debt.
However, since there is such a thing as DIP lending, you now have access to a lifeline that will keep your company afloat in the meantime.
How Does DIP Financing Work?
In a DIP financing situation, the court must approve the financing plan consistent with the protection granted to your business. When you’re able to secure DIP financing for your company, your vendors, suppliers, and customers will know that you’re still up for business and are able to provide products and services as always. You’ll also be able to make payments for goods and services during this period of reorganization in your company. Once the lender has found that your company is indeed worthy of credit after examining your finances, the market is likely to arrive at the same conclusion.
Benefits of DIP Financing to Debtors
Perhaps the foremost benefit of getting into DIP financing is having access to some much-needed capital from the credit markets. In a situation where finding additional funding for your business operations is quite difficult, DIP financing is just the solution you need to reorganize your business and be on your way to recovering from your predicament. This is also the reason why the request for DIP financing is one of the most common filings made in the first-day motion filings of Chapter 11 bankruptcy proceedings.
These measures are designed to help companies struggling with bankruptcy have a chance to bring their business back up and pay off their creditors. Without such measures in place, you won’t be able to fund your business’s ongoing operations, which could easily lead to the continuous decline of your business’s valuation.
DIP financing can also help you restore vendor and customer confidence in your company’s ability to maintain your liquidity. This is because DIP financing signals to your vendors and customers that you already have enough capital to continue operating your business during the bankruptcy process.
Looking at these benefits, any business that secures DIP financing can benefit from it and be on their way to restructuring their business and making it more profitable once more.
Porter Capital offers working capital solutions to businesses all over the country. Our team works with companies from various industries through invoice factoring and asset-based lending. We provide DIP financing and other flexible solutions that are exactly what every small business needs to get their company working like clockwork. Apply now for our working capital solutions to get a free quote.