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 debtor in possession 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 DIP financing 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 debtor in possession 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 assistance. The company can obtain the working capital they need through DIP financing to restructure and continue operating the business.