DIP Financing

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What is DIP Financing (Debtor in Possession)?

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 suspend services.

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. When in repayment, DIP financing loans are prioritized over additional debt, equity, and creditor claims. 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 still has to review and decide if approval is granted. There must be a security interest in the collateral, a premium interest rate, and an approved budget for DIP financing. The loan is dependent 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 but instead on the value of invoices and the creditworthiness of customers.

Both the borrowing business and the factoring firm can benefit from factoring. The borrower can get much-needed financing that is not dependent on its credit history, and the factoring company may obtain priority status under the Bankruptcy Code.

How Porter Capital provides DIP Assistance

  • Porter Capital can replace existing lenders in bankruptcy. If the existing lender wants out of a credit line secured by A/R, inventory, equipment, and/or real estate for a company entering bankruptcy, Porter Capital is a good fit. The existing lender is made whole on its entire loan.
  • Porter Capital’s rates are very similar to non-bankruptcy financing, and factoring is an excellent tool for companies seeking a credit line when entering bankruptcy.
  • If there is not a current lender, Porter Capital can offer financing secured by the company’s current or long-term assets.

Porter Capital structured a $13MM DIP Asset-Based Credit Line secured by the following assets and limits:

  • $6MM A/R Loan
  • $4MM PPE Loan
  • $3MM Inventory Loan

If you have clients in the process of filing for bankruptcy or who have already filed, click here, and we can help them out.

Reasons to Secure DIP Funding

Businesses experiencing bankruptcy are in a unique situation — they need to restructure their business with only the limited resources available. With Debtor in Possession financing, companies can bounce back from bankruptcy and take advantage of greater working capital. Porter Capital’s DIP financing offers high-limit loans and lines of credit so your business can do its best with what it has. Companies choose DIP loan services to:

  • Increase cash flow: With working capital, your business can make the appropriate decisions to reformat its goals and structure.
  • Improve flexibility: Our DIP financing services allow companies to get what they need from their loan and enjoy new profits over time.
  • Support their transition: Debtor in Possession lenders support your business as it goes through a vulnerable period.

Choose Porter Capital for DIP Financing Assistance

At Porter Capital, we are ready to discuss your DIP financing needs today. After more than 30 years in lending services, we know how to help businesses get back on their feet. We partner with various companies, each with unique working capital needs. Regardless of your budget, you can trust our DIP funding options to be an asset as you create new growth.

With DIP financing services, your business can soar to new heights. Porter Capital is eager to help you start. Invest in your company’s success with a strategic DIP loan or line of credit today! Apply online or contact our team to learn more about your options.

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Frequently Asked Questions

Many lenders see DIP financing as an attractive lending opportunity due to the favorable treatment that company bankruptcy loans get under United States bankruptcy law. Under the legislation, you must pay DIP creditors first before any other creditors may get money. Many lenders would commit to a DIP Chapter 11 loan, but they would not commit to a loan obligation to the same firm if the company had not filed for bankruptcy in the first place.

When a lender is found who is prepared to fund the business’s turnaround, the company applies for permission from the Bankruptcy Court to complete the turnaround. A “priority” security interest in the collateral, a market rate or even a premium rate of interest, an authorized budget, and other associated lender safeguards are all standard DIP financing conditions. If creditors believe you will harm them due to the loan, they may object to it.

In the end, it will be the Bankruptcy Court that will determine whether or not to authorize the loan. Suppose a business in Chapter 11 bankruptcy already has secured loans and wishes to borrow money on a secured basis equivalent to or senior to the current debts. In that case, the following are the steps that you must take:

  • It will be necessary to get permission from the existing lender(s) to proceed with the new loan.
  • To be successful, it must persuade the Bankruptcy Court that the current lender(s) will be adequately safeguarded and that they will not be made worse off due to the additional loan.

Even if a current lender who provided funding to the company before its bankruptcy filing has refused to provide additional advances to the firm before the bankruptcy filing, the lender may be prepared to commit to a DIP business bankruptcy loan after the filing. In addition to the additional protection provided by the Bankruptcy Code, the lender may have its objectives in mind while establishing the DIP loan.

If the Bankruptcy Court accepts a DIP loan and determines that it was issued in good faith, the credit will not be susceptible to a legal challenge and will remain in effect. That is in contrast to the identical loan issued outside of bankruptcy, which might have been susceptible to a legal challenge if you had made it outside of bankruptcy.

Debtor-in-Possession is a funding option for businesses filing for Chapter 11 bankruptcy. This gives borrowers the credibility to take out loans from lenders since they have a viable reorganization plan in place approved by the court. It’s a special type of loan that’s only available for firms facing bankruptcy.

Lenders see DIP financing as a valuable incentive to accept lenders, especially since the US bankruptcy law has certain provisions to mitigate potential risks. For instance, DIPO creditors must receive their payment before the borrower’s dues for other creditors are resolved. This is an assurance that lenders will come first regarding a bankrupt borrower’s repayment priorities.

Unlike a Chapter 7 bankruptcy, a business entity under a Chapter 11 bankruptcy must pay off withheld dues from creditors as the debtor. This means a business owner can’t just wave their outstanding debt. Since it’s an agreement that still maintains ties with creditors, it’s important to have an effective financial plan to pay off these dues. Thankfully, DIP financing can help streamline your repayment efforts.

Businesses in financial distress will benefit more from filing for bankruptcy instead of utilizing loans upon loans to temporarily pay off debt. Although out-of-court workouts can be effective strategies, they’re not always reliable and consistent with the outcome. For this reason, the best course of action for a business owner is to restructure with a Chapter 11 bankruptcy.

A Chapter 11 bankruptcy gives you a wide range of options for facilitating your financial strategies. Since recovering a business positive revenue stream will also require capital, it’s necessary for the debtor to find financial supporters. Unfortunately, lenders may be reluctant to take on borrowers trying to recover from their financial dilemma. Thankfully, the Bankruptcy Code can ease the risks a lender could take through Debtor-in-Possession Financing.